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  3. American Economic Review
  4. January 2014
  5. Estimating a Structural Model of Herd Behavior in Financial Markets

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Estimating a Structural Model of Herd Behavior in Financial Markets

  • Marco Cipriani
  • Antonio Guarino
American Economic Review
vol. 104, no. 1, January 2014
(pp. 224–51)
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Abstract

We develop a new methodology to estimate herd behavior in financial markets. We build a model of informational herding that can be estimated with financial transaction data. In the model, rational herding arises because of information-event uncertainty. We estimate the model using data on a NYSE stock (Ashland Inc.) during 1995. Herding occurs often and is particularly pervasive on some days. On average, the proportion of herd buyers is 2 percent; that of herd sellers is 4 percent. Herding also causes important informational inefficiencies in the market, amounting, on average, to 4 percent of the asset's expected value.

Citation

Cipriani, Marco, and Antonio Guarino. 2014. "Estimating a Structural Model of Herd Behavior in Financial Markets." American Economic Review 104 (1): 224–51. DOI: 10.1257/aer.104.1.224

Additional Materials

JEL Classification

  • C58 Financial Econometrics
  • D82 Asymmetric and Private Information; Mechanism Design
  • D83 Search; Learning; Information and Knowledge; Communication; Belief
  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 Information and Market Efficiency; Event Studies; Insider Trading