Risk aversion and herd behavior in financial markets
Abstract
We show that differences in investors risk aversion can generate herd behavior in stock markets where assets are traded sequentially. This in turn prevents markets from being efficient in the sense that financial market prices do not converge to the asset's fundamental value. The informational efficiency of the market depends on the distribution of the risky asset across risk averse agents. These results are obtained without introducing multidimensional uncertainty.Download Info
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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 758.Length: 36 pages
Date of creation: 14 May 2002
Date of revision:
Handle: RePEc:ebg:heccah:0758
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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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Related research
Keywords: herd behavior; stock markets; efficiency;Other versions of this item:
- Décamps, Jean-Paul & Lovo, Stefano, 2003. "Risk Aversion and Herd Behavior in Financial Markets," IDEI Working Papers 246, Institut d'Économie Industrielle (IDEI), Toulouse.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-12-02 (All new papers)
- NEP-CFN-2002-12-02 (Corporate Finance)
- NEP-FIN-2002-12-02 (Finance)
- NEP-FMK-2002-12-02 (Financial Markets)
- NEP-RMG-2002-12-02 (Risk Management)
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Décamps, Jean-Paul & Lovo, Stefano, 2003.
"Market Informational Inefficiency, Risk Aversion and Quantity Grid,"
IDEI Working Papers
177, Institut d'Économie Industrielle (IDEI), Toulouse.
- LOVO, Stefano & DECAMPS, Jean-Paul, 2003. "Market informational inefficiency, risk aversion and quantity grid," Les Cahiers de Recherche 770, HEC Paris.
- Maria Grazia Romano, 2007.
"Learning, Cascades, and Transaction Costs,"
Review of Finance,
European Finance Association, vol. 11(3), pages 527-560.
- Maria Grazia Romano, 2004. "Learning, Cascades and Transaction Costs," CSEF Working Papers 123, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Feb 2006.
- J L Ford, David Kelsey and W Pang, 2005. "Ambiguity in Financial Markets: Herding and Contrarian Behaviour," Discussion Papers 05-11, Department of Economics, University of Birmingham.
- Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-156, Boston University - Department of Economics.
- Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - Working Papers Series WP2005-027, Boston University - Department of Economics.
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