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Rational Herd Behavior and the Globalization of Securities Markets

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Author Info
Calvo, Guillermo A.
Mendoza, Enrique

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Abstract

This paper shows that globalization of securities markets exacerbates the volatility of capital flows by strengthening incentives for herding behavior. This is a prediction of a mean-variance portfolio optimization model with imperfect information, in which investors acquire country-specific expertise at a fixed cost and incur variable reputational costs. The model produces equilibria in which incentives to confirm rumors decrease with globalization. Simulations based on equity markets data and country credit ratings suggest that herd behavior can induce large capital outflows from emerging markets.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 97-26.

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Date of creation: 1997
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Handle: RePEc:duk:dukeec:97-26

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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