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Relative Performance and Herding in Financial Markets

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  • Emanuela Sciubba

    (Erasmus University)

Abstract

We consider a stylised model of a financial market where assets are traded over two periods by three agents: two fund managers and a third large trader that represents the rest of the market. Fund managers are rewarded at the end of the second period by a bonus that is awarded to the manager that obtains the best cumulative performance. We show that, even when information is symmetric, inefficient herding may be observed as an equilibrium outcome. Herding among fund managers occurs when the size of the rest of the market is large, but finite, so that the impact of the herd on equilibrium prices is not negligible abd indeed destabilising for asset prices.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1570.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1570

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Cited by:
  1. Lóránth, Gyöngyi & Sciubba, Emanuela, 2002. "Relative Performance, Risk and Entry in the Mutual Fund Industry," CEPR Discussion Papers 3504, C.E.P.R. Discussion Papers.
  2. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.
  3. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.

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