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The Effect of Rating Agencies on Herd Behaviour

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Author Info
Giovanni Ferri
Andrea Morone

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Abstract

This paper purports to provide some evidence on the effect of rating agencies on herding in financial markets. By means of a laboratory experiment, we investigate the effect and interaction between private and public information. Previous experiments showed that lemmings behaviour can survive in a market context where information is private (Hey and Morone, 2004), and that an experimental market can be very volatile and not efficient in transmitting information (Alfarano et al., 2006). We study experimentally, if socially undesirable behaviour – that survives in a market contest – may be eliminated owing to the presence of rating agencies.

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Publisher Info
Paper provided by Economics and Econometrics Research Institute (EERI) in its series EERI Research Paper Series with number EERI_RP_2008_21.

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Length: 24 pages
Date of creation: 21 Oct 2008
Date of revision:
Handle: RePEc:eei:rpaper:eeri_rp_2008_21

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Related research
Keywords: Herd behaviour; informational cascades; rating agency; bubble.;

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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References listed on IDEAS
Please 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.:
  1. Fiore, Annamaria & Morone, Andrea, 2008. "A Simple Note on Informational Cascades," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(1), pages 1-21. [Downloadable!]
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  2. Hsueh, L. Paul & Liu, Y. Angela, 1992. "Market anticipation and the effect of bond rating changes on common stock prices," Journal of Business Research, Elsevier, vol. 24(3), pages 225-239, May. [Downloadable!] (restricted)
  3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
  4. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-16, October. [Downloadable!] (restricted)
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  5. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September. [Downloadable!] (restricted)
  6. Georges, Christophre, 2006. "Learning with misspecification in an artificial currency market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(1), pages 70-84, May. [Downloadable!] (restricted)
  7. Andrea Morone, 2008. "Financial markets in the laboratory: an experimental analysis of some stylized facts," Quantitative Finance, Taylor and Francis Journals, vol. 8(5), pages 513-532. [Downloadable!] (restricted)
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  8. Mark Carlson & Galina Hale, 2006. "Rating Agencies and Sovereign Debt Rollover," Topics in Macroeconomics, Berkeley Electronic Press, vol. 6(2), pages 1375-1375. [Downloadable!] (restricted)
  9. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  10. Griffin, Paul A & Sanvicente, Antonio Z, 1982. " Common Stock Returns and Rating Changes: A Methodological Comparison," Journal of Finance, American Finance Association, vol. 37(1), pages 103-19, March. [Downloadable!] (restricted)
  11. Huber, Jurgen & Kirchler, Michael & Sutter, Matthias, 2008. "Is more information always better: Experimental financial markets with cumulative information," Journal of Economic Behavior & Organization, Elsevier, vol. 65(1), pages 86-104, January. [Downloadable!] (restricted)
  12. John D. Hey & Andrea Morone, 2004. "Do Markets Drive Out Lemmings-or Vice Versa?," Economica, London School of Economics and Political Science, vol. 71(284), pages 637-659, November. [Downloadable!] (restricted)
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