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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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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. J. Doyne Farmer & Shareen Joshi, 2000. "The price dynamics of common trading strategies," Papers cond-mat/0012419,
  2. Fiore, Annamaria & Morone, Andrea, 2007. "A Simple Note on Informational Cascades," Economics Discussion Papers 2007-21, Kiel Institute for the World Economy.
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  8. 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.
  9. 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.
  10. Andrea Morone & Eleni Samanidou, 2007. "A simple note on Herd Behaviour," SERIES 0013, Dipartimento di Scienze economiche e metodi matematici - Università di Bari, revised Feb 2007.
  11. 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.
  12. Georges, Christophre, 2006. "Learning with misspecification in an artificial currency market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(1), pages 70-84, May.
  13. 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.
  14. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  15. 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.
  16. Gary S. Becker, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," University of Chicago - George G. Stigler Center for Study of Economy and State 67, Chicago - Center for Study of Economy and State.
  17. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
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  19. 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.
  20. Pagano, Marco & Volpin, Paolo, 2009. "Credit Ratings Failures and Policy Options," CEPR Discussion Papers 7556, C.E.P.R. Discussion Papers.
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  22. Andrea Morone & Eleni Samanidou, 2008. "A simple note on herd behaviour," Journal of Evolutionary Economics, Springer, vol. 18(5), pages 639-646, October.
  23. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  24. 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.
  25. 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.
  26. 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.
  27. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  28. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  29. 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.
  30. 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.
  31. Impson, C Michael & Karafiath, Imre & Glascock, John L, 1992. "Testing Beta Stationarity across Bond Rating Changes," The Financial Review, Eastern Finance Association, vol. 27(4), pages 607-18, November.
  32. Morone, Andrea, 2012. "A simple model of herd behavior, a comment," Economics Letters, Elsevier, vol. 114(2), pages 208-211.
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