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The Herd Behavior and the Financial Instability

Author

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  • 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. 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.
    2. Amil Dasgupta & Andrea Prat & Michela Verardo, 2011. "The Price Impact of Institutional Herding," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 892-925.
    3. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers dp627, Financial Markets Group.
    4. Mr. C. A. E. Goodhart & Miguel A. Segoviano, 2009. "Banking Stability Measures," IMF Working Papers 2009/004, International Monetary Fund.
    5. Segoviano, Miguel A. & Goodhart, Charles, 2009. "Banking stability measures," LSE Research Online Documents on Economics 24416, London School of Economics and Political Science, LSE Library.
    6. Siebert, Horst, 2008. "An international rule system to avoid financial instability," Kiel Working Papers 1461, Kiel Institute for the World Economy (IfW Kiel).
    7. Alexandra Lai, 2002. "Modelling Financial Instability: A Survey of the Literature," Staff Working Papers 02-12, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Hazem Krichene & Mhamed-Ali El-Aroui, 2018. "Artificial stock markets with different maturity levels: simulation of information asymmetry and herd behavior using agent-based and network models," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(3), pages 511-535, October.

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    More about this item

    Keywords

    financial instability; herd behavior; financial markets; information; signals;
    All these keywords.

    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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