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Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals

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  • Marco Cipriani

    ()
    (Department of Economics/Institute for International Economic Policy, George Washington University)

  • Antonio Guarino

    ()
    (Department of Economics and ELSE, University College London)

Abstract

We study herd behavior in a laboratory financial market with financial market professionals. An important novelty of the experimental design is the use of a strategy-like method. This allows us to detect herd behavior directly by observing subjects’ decisions for all realizations of their private signal. In the paper, we compare two treatments: one in which the price adjusts to the order flow in such a way that herding should never occur, and one in which the presence of event uncertainty makes herding possible. In the first treatment, subjects herd seldom, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of sub jects, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, the proportion of herding decisions increases, but not as much as the theory would suggest. Moreover, contrarianism disappears altogether. In both treatments, in contrast with what theory predicts, subjects sometimes prefer to abstain from trading, which affects the process of price discovery negatively.

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Bibliographic Info

Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2009-16.

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Length: 36 pages
Date of creation: Jul 2008
Date of revision:
Publication status: Published, Journal of the European Economic Association, MIT Press, Vol. 7(1), pp. 206-233, 2009
Handle: RePEc:gwi:wpaper:2009-16

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Keywords: Herding; Contrarianism; Financial Market Professionals;

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Cited by:
  1. Giovanni Ferri & Andrea Morone, 2014. "The effect of rating agencies on herd behaviour," Journal of Economic Interaction and Coordination, Springer, vol. 9(1), pages 107-127, April.
  2. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
  3. Chung-Ping Loh & Katrin Nihalani & Oliver Schnusenberg, 2012. "Measuring attitude toward social health insurance," The European Journal of Health Economics, Springer, vol. 13(6), pages 707-722, December.
  4. Alain Cohn & Jan Engelmann & Ernst Fehr & Michel Maréchal, 2013. "Evidence for countercyclical risk aversion: an experiment with financial professionals," UBSCENTER - Working Papers 004, UBS International Center of Economics in Society - Department of Economics - University of Zurich.
  5. Marco Cipriani & Antonio Guarino, 2012. "Estimating a structural model of herd behavior in financial markets," Staff Reports 561, Federal Reserve Bank of New York.
  6. repec:hal:wpaper:halshs-00671378 is not listed on IDEAS
  7. Christopher Boortz & Stephanie Kremer & Simon Jurkatis & Dieter Nautz, 2014. "Information Risk, Market Stress and Institutional Herding in Financial Markets: New Evidence Through the Lens of a Simulated Model," SFB 649 Discussion Papers SFB649DP2014-029, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. Pop, Raluca Elena, 2012. "Herd behavior towards the market index: evidence from Romanian stock exchange," MPRA Paper 51595, University Library of Munich, Germany.
  9. Orlowski, Lucjan T., 2012. "Financial crisis and extreme market risks: Evidence from Europe," Review of Financial Economics, Elsevier, vol. 21(3), pages 120-130.
  10. Oliver Schnusenberg & Chung-Ping Loh & Katrin Nihalani, 2013. "The Role of Financial Wellbeing, Sociopolitical Attitude, Self-Interest, and Lifestyle in One’s Attitude Toward Social Health Insurance," Applied Health Economics and Health Policy, Springer, vol. 11(4), pages 369-381, August.

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