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Herd behavior and aggregate fluctuations in financial markets

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  • Rama Cont

    (Science & Finance, Capital Fund Management)

  • Jean-Philippe Bouchaud

    (Science & Finance, Capital Fund Management
    CEA Saclay;)

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    Abstract

    We present a simple model of a stock market where a random communication structure between agents gives rise to a heavy tails in the distribution of stock price variations in the form of an exponentially truncated power-law, similar to distributions observed in recent empirical studies of high frequency market data. Our model provides a link between two well-known market phenomena: the heavy tails observed in the distribution of stock market returns on one hand and 'herding' behavior in financial markets on the other hand. In particular, our study suggests a relation between the excess kurtosis observed in asset returns, the market order flow and the tendency of market participants to imitate each other.

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    Bibliographic Info

    Paper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 500028.

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    Date of creation: Dec 1997
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    Publication status: Published in Journal of Macroeconomic Dynamics, 4 (2), 170 (2000)
    Handle: RePEc:sfi:sfiwpa:500028

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