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Herd Behavior in Efficient Financial Markets Author info | Abstract | Publisher info | Download info | Related research | Statistics Andreas Park
Hamid Sabourian
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Rational herd behavior and informationally efficient security prices have long been considered to be mutually exclusive but for exceptional cases. In this paper we describe conditions on the underlying information structure that are necessary and sufficient for informational herding. Employing a standard sequential security trading model, we argue that people may be subject to herding if and only if there is sufficient amount of noise and, loosely, their information leads them to believe that extreme outcomes are more likely than moderate ones. We then show that herding has a significant effect on prices: prices can move substantially during herding and they become more volatile than if there were no herding. Furthermore, herding can be persistent and can affect the process of learning. We also characterize conditions for contrarian behavior. Our analysis suggests that herding (and contrarian behavior) may be more pervasive than was originally thought. Hence, the paper provides a new perspective on herding in financial markets with efficient prices
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number
tecipa-249.
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Length: 44 pages
Date of creation: 03 Jul 2006Date of revision:
Handle: RePEc:tor:tecipa:tecipa-249Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario Phone: (416) 978-5283 Fax: (416) 978-6713
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Keywords: Microstructure ; Sequential Trades ; Herding ; Monotone Likelihood ; Other versions of this item:
Find related papers by JEL classification: C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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references 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.)
Antonio Guarino & Marco Cipriani, 2008.
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[Downloadable!]
Other versions:
Antonio Guarino & Marco Cipriani, 2008.
"Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals ,"
WEF Working Papers
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Journal of the European Economic Association ,
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