Herd behavior and aggregate fluctuations in financial markets
AbstractWe 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 InfoPaper provided by EconWPA in its series Finance with number 9712008.
Length: 29 pages
Date of creation: 30 Dec 1997
Date of revision: 30 Dec 1997
Note: Type of Document - Postscript; prepared on UNIX Sparc TeX; pages: 29
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Stock market; random graphs; market organization; herding; heavy tails..;
Find related papers by JEL classification:
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G19 - Financial Economics - - General Financial Markets - - - Other
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