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Institutional Herding in Financial Markets: New Evidence through the Lens of a Simulated Model

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  • Christopher Boortz
  • Simon Jurkatis
  • Stephanie Kremer
  • Dieter Nautz
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    Abstract

    Due to data limitations and the absence of testable, model-based predictions, theory and evidence on herd behavior are only loosely connected. This paper contributes towards closing this gap in the herding literature. We use numerical simulations of a herd model to derive new, theory-based predictions for aggregate herding intensity. Using high-frequency, investor-specific trading data we confirm the predicted impact of information risk on herding. In contrast, the increase in buy herding measured for the financial crisis period cannot be explained by the herd model.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.432226.de/dp1336.pdf
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    Bibliographic Info

    Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1336.

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    Length: 40 p.
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:diw:diwwpp:dp1336

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    Keywords: Herd Behavior; Institutional Trading; Model Simulation;

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    References

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    1. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-98, December.
    2. Kremer, Stephanie & Nautz, Dieter, 2013. "Causes and consequences of short-term institutional herding," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1676-1686.
    3. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    24. Park, A. & Sabourian, H., 2009. "Herding and Contrarian Behaviour in Financial Markets," Cambridge Working Papers in Economics 0939, Faculty of Economics, University of Cambridge.
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    26. Chang, Eric C. & Cheng, Joseph W. & Khorana, Ajay, 2000. "An examination of herd behavior in equity markets: An international perspective," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1651-1679, October.
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