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Herd Behavior in Financial Markets

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Abstract

Over the last twenty-five years, there has been a lot of interest in herd behavior in financial markets—that is, a trader’s decision to disregard her private information to follow the behavior of the crowd. A large theoretical literature has identified abstract mechanisms through which herding can arise, even in a world where people are fully rational. Until now, however, the empirical work on herding has been completely disconnected from this theoretical analysis; it simply looked for statistical evidence of trade clustering and, when that evidence was present, interpreted the clustering as herd behavior. However, since decision clustering may be the result of something other than herding—such as the common reaction to public announcements—the existing empirical literature cannot distinguish “spurious” herding from “true” herd behavior.

Suggested Citation

  • Marco Cipriani & Antonio Guarino, 2015. "Herd Behavior in Financial Markets," Liberty Street Economics 20150309, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87015
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    Keywords

    herd behavior; financial markets;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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