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Herd behavior and aggregate fluctuations in financial markets

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  • Rama CONT

    (Dept of Economics, American University & Centre d'Etudes de Saclay, France)

  • Jean-Philippe BOUCHAUD

    (Centre d'Etudes de Saclay, France and Science & Finance Research Group)

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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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    File URL: http://128.118.178.162/eps/fin/papers/9712/9712008.ps.gz
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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 9712008.

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    Length: 29 pages
    Date of creation: 30 Dec 1997
    Date of revision: 30 Dec 1997
    Handle: RePEc:wpa:wuwpfi:9712008

    Note: Type of Document - Postscript; prepared on UNIX Sparc TeX; pages: 29
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    Web page: http://128.118.178.162

    Related research

    Keywords: Stock market; random graphs; market organization; herding; heavy tails..;

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    References

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