On the robustness of herds
Herd behavior is argued by many to be present in many markets. Existing models of such behavior have been subjected to two apparently devastating critiques. The continuous investment critique is that in the basic model herds disappear if simple zero-one investment decisions are replaced by the more appealing assumption that investment decisions are continuous. The price critique is that herds disappear if, as seems natural, other investors can observe asset market prices. We argue that neither critique is devastating. We show that once we replace the unappealing exogenous timing assumption of the early models that investors move in a pre-specified order by a more appealing endogenous timing assumption that investors can move whenever they choose then herds reappear.
|Date of creation:||2002|
|Contact details of provider:|| Postal: 90 Hennepin Avenue, P.O. Box 291, Minneapolis, MN 55480-0291|
Phone: (612) 204-5000
Web page: http://minneapolisfed.org/
More information through EDIRC
|Order Information:||Web: http://www.minneapolisfed.org/pubs/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Glosten, Lawrence R. & Milgrom, Paul R., 1985.
"Bid, ask and transaction prices in a specialist market with heterogeneously informed traders,"
Journal of Financial Economics,
Elsevier, vol. 14(1), pages 71-100, March.
- Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Caplin, A. & Leahy, J., 1992.
"Business as Usual, Market Crashes, and Wisdom after the Fact,"
Harvard Institute of Economic Research Working Papers
1594, Harvard - Institute of Economic Research.
- Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
- Chamley, Christophe & Gale, Douglas, 1994.
"Information Revelation and Strategic Delay in a Model of Investment,"
Econometric Society, vol. 62(5), pages 1065-1085, September.
- Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
- 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.
- 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.
- Grossman, Sanford J & Stiglitz, Joseph E, 1980.
"On the Impossibility of Informationally Efficient Markets,"
American Economic Review,
American Economic Association, vol. 70(3), pages 393-408, June.
- Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
- Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
- Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
- Guillermo A. Calvo & Enrique G. Mendoza, 1996.
"Mexico's balance-of-payments crisis: a chronicle of death foretold,"
International Finance Discussion Papers
545, Board of Governors of the Federal Reserve System (U.S.).
- Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
- Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-748, September.
When requesting a correction, please mention this item's handle: RePEc:fip:fedmwp:622. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jannelle Ruswick)
If references are entirely missing, you can add them using this form.