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Estimating a Structural Model of Herd Behavior in Financial Markets

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Estimating a Structural Model of Herd Behavior in Financial Markets

Federal Reserve Bank of New York,

5 Minuten Lesezeit
5 Take-aways
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Was ist drin?

Bulls may sometimes run on Wall Street, but do herds control the market?

Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • Science Based

Recommendation

Researchers Marco Cipriani and Antonio Guarino present an innovative approach to the study of “herding,” traders’ tendency to base their transactions on market movements even if those actions contradict the traders’ information. Cipriani and Guarino’s model is the first to blend “social learning” theories of motivation with trading statistics to derive an understanding of why traders act as they do. getAbstract suggests their scholarly work to academics, regulators and financial services professionals interested in cutting-edge research on stock market behavior.

Summary

Securities traders “herd” when they buy or sell an asset based on others’ prior trades of that security. They conduct such transactions even when their “private information” contradicts what they see happening in the market. Herders “buy after the price has risen or…sell after the price has fallen.” Estimating how much herding goes on in the market for a given stock is difficult but essential, because herding creates “informational inefficiencies” that correlate to about “4% of [an] asset’s expected value.”

In this model, individual traders receive and assess data about...

About the Authors

Marco Cipriani works at the Federal Reserve Bank of New York. Antonio Guarino is a reader at the University College London.

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