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Herd Behavior and Cascading in Capital Markets: A Review and Synthesis

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Author Info
Hirshleifer, David
Teoh, Siew Hong

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Abstract

We review theory and evidence relating to herd behaviour, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behavior of investors, firms, and analysts. We consider both incentives for parties to engage in herding or cascading, and the incentives for parties to protect against or take advantage of herding or cascading by others.

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File URL: http://mpra.ub.uni-muenchen.de/5186/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5186.

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Date of creation: 19 Dec 2001
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Publication status: Published in European Financial Management 1.9(2003): pp. 25-66
Handle: RePEc:pra:mprapa:5186

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Related research
Keywords: herd behavior informational cascades social learning analyst herding capital markets financial reporting behavioral finance investor psychology market efficiency

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Find related papers by JEL classification:
M14 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Corporate Culture; Social Responsibility
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G1 - Financial Economics - - General Financial Markets
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
G3 - Financial Economics - - Corporate Finance and Governance
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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. Marcello Pericoli & Massimo Sbracia, 2006. "The CAPM and the risk appetite index; theoretical differences and empirical similarities," Temi di discussione (Economic working papers) 586, Bank of Italy, Economic Research Department. [Downloadable!]
  2. Miroslav Misina, 2003. "What Does the Risk-Appetite Index Measure?," Working Papers 03-23, Bank of Canada. [Downloadable!]
  3. Pedro Rey Biel, 2004. "Inequity aversion and team incentives," Microeconomics 0407009, EconWPA. [Downloadable!]
    Other versions:
  4. Michael Kosfeld & Ferdinand von Siemens, 2007. "Competition, Cooperation, and Corporate Culture," IEW - Working Papers iewwp328, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  5. Jens Carsten Jackwerth., 1996. "Recovering Risk Aversion from Option Prices and Realized Returns," Research Program in Finance Working Papers RPF-265, University of California at Berkeley. [Downloadable!]
    Other versions:
  6. Tim Bollerslev & Michael Gibson & Hao Zhou, 2004. "Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities," Finance and Economics Discussion Series 2004-56, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  7. Mikhail Golosov & Larry E. Jones & Michele Tertilt, 2004. "Efficiency with Endogenous Population Growth," NBER Working Papers 10231, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Raut, L K & Srinivasan, T N, 1994. "Dynamics of Endogenous Growth," Economic Theory, Springer, vol. 4(5), pages 777-90, August.
  9. Kothari, S. P. & Shanken, Jay, 1992. "Stock return variation and expected dividends : A time-series and cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 31(2), pages 177-210, April. [Downloadable!] (restricted)
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Cited by:
(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. Rincke, Johannes, 2005. "Neighborhood Influence and Political Change : Evidence from US School Districts," ZEW Discussion Papers 05-16, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  2. Andreas Park & Hamid Sabourian, 2006. "Herd Behavior in Efficient Financial Markets," Working Papers tecipa-249, University of Toronto, Department of Economics. [Downloadable!]
  3. Anil Arya & Jonathan Glover & Brian Mittendorf, 2006. "Hierarchical reporting, aggregation, and information cascades," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(5), pages 355-362. [Downloadable!]
  4. Johannes Rincke, 2005. "Neighborhood Influence and Political Change: Evidence from US School Districts," Public Economics 0511011, EconWPA. [Downloadable!]
  5. Sorensen, Morten, 2007. "Learning by Investing: Evidence from Venture Capital," SIFR Research Report Series 53, Swedish Institute for Financial Research. [Downloadable!]
  6. Mike Cudd & Marcelo Eduardo & Lloyd Roberts, 2008. "Short-cuts in issuance decisions and subsequent small firm performance," Journal of Economics and Finance, Springer, vol. 32(3), pages 260-270, July. [Downloadable!] (restricted)
  7. Johannes Rincke, 2005. "Policy Innovation in Local Jurisdictions: Testing the Neighborhood Influence Against the Free-Riding Hypothesis," Public Economics 0511017, EconWPA. [Downloadable!]
  8. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," Experimental 0502002, EconWPA. [Downloadable!]
    Other versions:
  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. Mathias Drehmann & Joerg Oechssler & Andreas Roider, 2003. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," University of California at Santa Barbara, Economics Working Paper Series 18-03, Department of Economics, UC Santa Barbara. [Downloadable!]
    Other versions:
  11. 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!]
  12. Thomas Schuster, 2003. "Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media," Finance 0307014, EconWPA. [Downloadable!]
  13. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  14. Barbara Alemanni & José Renato Haas Ornelas, 2006. "Herding Behavior by Equity Foreign Investors on Emerging Markets," Working Papers Series 125, Central Bank of Brazil, Research Department. [Downloadable!]
  15. Cornelis A. Los & Rossitsa M. Yalamova, 2004. "Multi-Fractal Spectral Analysis of the 1987 Stock Market Crash," Finance 0409050, EconWPA. [Downloadable!]
  16. Amita Batra, 2003. "The Dynamics of foreign portfolio inflows and equity returns in India," Indian Council for Research on International Economic Relations, New Delhi Working Papers 109, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
  17. Johannes Rincke, 2005. "Policy Innovation in Local Jurisdictions: Testing the Neighborhood Influence Against the Free-Riding Hypothesis," Public Economics 0511009, EconWPA. [Downloadable!]
  18. Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-156, Boston University - Department of Economics. [Downloadable!]
  19. Maria Grazia Romano, 2004. "Learning, Cascades and Transaction Costs," CSEF Working Papers 123, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  20. Francesco Feri & Miguel A. Melendez-Jimenez & Giovanni Ponti & Fernando Vega Redondo, 2008. "Error Cascades in Observational Learning: An Experiment on the Chinos Game," Economics Working Papers ECO2008/14, European University Institute. [Downloadable!]
  21. Dayoub, Mariam & Lasagabaster, Esperanza, 2008. "General trends in competition policy and investment regulation in mandatory defined contribution markets in Latin America," Policy Research Working Paper Series 4720, The World Bank. [Downloadable!]
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