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Financial crises as herds: overturning the critiques

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Author Info
V. V. Chari
Patrick J. Kehoe

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Abstract

Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial crises. Herds disappear from these models if two of their unappealing assumptions are modified: if their zero-one investment decisions are made continuous and if their investors are allowed to trade assets with market-determined prices. However, both critiques are overturned-herds reappear in these models-once another of their unappealing assumptions is modified: if, instead of moving in a prespecified order, investors can move whenever they choose.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 316.

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Date of creation: 2003
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Handle: RePEc:fip:fedmsr:316

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Keywords: Financial crises;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  15. repec:fth:coluec:602 is not listed on IDEAS
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(explanations, 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. Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005. "Self-Fulfilling Currency Crises: The Role of Interest Rates," NBER Working Papers 11191, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Andreas Park & Hamid Sabourian, 2006. "Herd Behavior in Efficient Financial Markets," Working Papers tecipa-249, University of Toronto, Department of Economics. [Downloadable!]
  3. Lütje, Torben, 2004. "To Be Good or To Be Better: Asset Managers Attitudes Towards Herding," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-297, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  4. Helmut Wagner & Wolfram Berger, 2004. "Globalization, Financial Volatility and Monetary Policy," Empirica, Springer, vol. 31(2), pages 163-184, June. [Downloadable!] (restricted)
    Other versions:
  5. Andreas Park, 2008. "Bid-Ask Spreads and Volume:The Role of Trade Timing," Working Papers tecipa-309, University of Toronto, Department of Economics. [Downloadable!]
  6. Christian Hellwig, 2004. "Self-Fulfilling Currency Crises: The Role of Interest Rates (A.E.R., December 2006)," UCLA Economics Online Papers 338, UCLA Department of Economics. [Downloadable!]
  7. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," American Economic Review, American Economic Association, vol. 95(5), pages 1427-1443, December. [Downloadable!]
    Other versions:
  8. Ryo Horii & Yoshiyasu Ono, 2005. "Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations," Macroeconomics 0504016, EconWPA. [Downloadable!]
  9. Jonathan E. Alevy & Michael S. Haigh & John List, 2006. "Information Cascades: Evidence from An Experiment with Financial Market Professionals," NBER Working Papers 12767, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. 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. [Downloadable!]
  11. Fernando Broner, 2003. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," Economics Working Papers 839, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2007. [Downloadable!]
    Other versions:
  12. Francesco Feri & Miguel A. Meléndez-Jiménez & Giovanni Ponti & Fernando Vega Redondo, 2008. "Error Cascades in Observational Learning: An Experiment on the Chinos Game," Working Papers 2008-21, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
    Other versions:
  13. Melisso Boschi & Aditya Goenka, 2006. "Habit formation and the transmission of financial crises," Economics Discussion Papers 608, University of Essex, Department of Economics. [Downloadable!]
  14. Amil Dasgupta & Andrea Prat, 2005. "Reputation and Asset Prices: A Theory of Information Cascades and Systematic Mispricing," Levine's Bibliography 784828000000000368, UCLA Department of Economics. [Downloadable!]
  15. Pritha Mitra, 2006. "Post-Crisis Recovery: When Does Increased Fiscal Discipline Work?," IMF Working Papers 06/219, International Monetary Fund. [Downloadable!]
  16. Dan Levin & James Peck, 2005. "Investment Dynamics with Common and Private Values," Levine's Bibliography 666156000000000607, UCLA Department of Economics. [Downloadable!]
    Other versions:
  17. Andreas Park & Daniel Sgroi, 2008. "When Herding and Contrarianism Foster Market Efficiency: A Financial Trading Experiment," Working Papers tecipa-316, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  18. Melisso Boschi & Aditya Goenka, 2007. "Relative Risk Aversion And The Transmission Of Financial Crises," CAMA Working Papers 2007-28, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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