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The effect of rating agencies on herd behaviour

  • Giovanni Ferri

    ()

  • Andrea Morone

    ()

This paper purports to provide some evidence on the effect of rating agencies in financial markets. By means of a laboratory experiment, we investigate the effect and interaction between private and public information. We reached two conclusions: (1) indeed, the rating agency can speed up price convergence, (2) but not always to the fundamental price. Copyright Springer-Verlag Berlin Heidelberg 2014

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File URL: http://hdl.handle.net/10.1007/s11403-013-0114-0
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Article provided by Springer in its journal Journal of Economic Interaction and Coordination.

Volume (Year): 9 (2014)
Issue (Month): 1 (April)
Pages: 107-127

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Handle: RePEc:spr:jeicoo:v:9:y:2014:i:1:p:107-127
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  1. Morone, Andrea, 2012. "A simple model of herd behavior, a comment," Economics Letters, Elsevier, vol. 114(2), pages 208-211.
  2. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-16, October.
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  4. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
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  6. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
  7. Huber, Jurgen & Kirchler, Michael & Sutter, Matthias, 2008. "Is more information always better: Experimental financial markets with cumulative information," Journal of Economic Behavior & Organization, Elsevier, vol. 65(1), pages 86-104, January.
  8. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  9. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  10. Norden, Lars & Weber, Martin, 2004. "Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements," CEPR Discussion Papers 4250, C.E.P.R. Discussion Papers.
  11. Louise Allsopp & John Hey, 2000. "Two Experiments to Test a Model of Herd Behaviour," Experimental Economics, Springer, vol. 3(2), pages 121-136, October.
  12. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," American Economic Review, American Economic Association, vol. 95(5), pages 1427-1443, December.
  13. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
  14. Antonio Guarino & Marco Cipriani, 2008. "Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals," WEF Working Papers 0047, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  15. Griffin, Paul A & Sanvicente, Antonio Z, 1982. " Common Stock Returns and Rating Changes: A Methodological Comparison," Journal of Finance, American Finance Association, vol. 37(1), pages 103-19, March.
  16. Fiore, Annamaria & Morone, Andrea, 2007. "A Simple Note on Informational Cascades," Economics Discussion Papers 2007-21, Kiel Institute for the World Economy.
  17. John D. Hey & Andrea Morone, 2004. "Do Markets Drive Out Lemmings-or Vice Versa?," Economica, London School of Economics and Political Science, vol. 71(284), pages 637-659, November.
  18. Andrea Morone & Eleni Samanidou, 2008. "A simple note on herd behaviour," Journal of Evolutionary Economics, Springer, vol. 18(5), pages 639-646, October.
  19. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  20. Pagano, Marco & Volpin, Paolo, 2009. "Credit Ratings Failures and Policy Options," CEPR Discussion Papers 7556, C.E.P.R. Discussion Papers.
  21. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 322.
  22. Simone Alfarano & Iván Barreda-Tarrazona & Eva Camacho-Cuena, 2006. "On the role of heterogeneous and imperfect information in a laboratory financial market," Central European Journal of Operations Research, Springer, vol. 14(4), pages 417-433, December.
  23. James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," UMASS Amherst Economics Working Papers 2008-14, University of Massachusetts Amherst, Department of Economics.
  24. Goh, Jeremy C. & Ederington, Louis H., 1999. "Cross-sectional variation in the stock market reaction to bond rating changes," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(1), pages 101-112.
  25. Georges, Christophre, 2006. "Learning with misspecification in an artificial currency market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(1), pages 70-84, May.
  26. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  27. Andrea Morone, 2008. "Financial markets in the laboratory: an experimental analysis of some stylized facts," Quantitative Finance, Taylor & Francis Journals, vol. 8(5), pages 513-532.
  28. Hsueh, L. Paul & Liu, Y. Angela, 1992. "Market anticipation and the effect of bond rating changes on common stock prices," Journal of Business Research, Elsevier, vol. 24(3), pages 225-239, May.
  29. J. Doyne Farmer & Shareen Joshi, 2000. "The price dynamics of common trading strategies," Papers cond-mat/0012419, arXiv.org.
  30. Giovanni Ferri, 2004. "More analysts, better ratings: Do rating agencies invest enough in less developed countries?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 77-98, May.
  31. Carlson Mark & Hale Galina B, 2006. "Rating Agencies and Sovereign Debt Rollover," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-32, September.
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