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The Herd Behavior and the Financial Instability

Author

Listed:
  • Cristian Ionescu

    () (Academy of Economic Studies, Romania)

Abstract

Given the international financial situation of the last 50 years, and considering the complexity and severity of the financial crises, it is important to study the episodes of financial instability, and especially to understand both operating mechanisms and propagation mechanisms. One endogenous mechanism of financial instability is the herd behavior, which may increase the volatility and the amplitude of any sub-part of the financial system. This paper aims to analyze this phenomenon, considering the behavior of the financial market participants, the role of information in the making decisions process, banking responsibility regarding the herd behavior. The paper also illustrates two examples of herd behavior (run bank and the "too many to fail" problem), and presents three herding measures, in an attempt to achieve a quantitative analysis of the phenomenon, besides the qualitative analysis exposed above.

Suggested Citation

  • Cristian Ionescu, 2012. "The Herd Behavior and the Financial Instability," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 12(1), pages 129-140.
  • Handle: RePEc:pet:annals:v:12:y:2012:i:1:p:129-140
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    References listed on IDEAS

    as
    1. Alexandra Lai, 2002. "Modelling Financial Instability: A Survey of the Literature," Staff Working Papers 02-12, Bank of Canada.
    2. Siebert, Horst, 2008. "An international rule system to avoid financial instability," Kiel Working Papers 1461, Kiel Institute for the World Economy (IfW).
    3. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    4. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers dp627, Financial Markets Group.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    financial instability; herd behavior; financial markets; information; signals;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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