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Risk Aversion and Herd Behavior in Financial Markets

Author

Listed:
  • Jean-Paul Decamps

    (CRM - Centre de Recherche en Management - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique)

  • Stefano Lovo

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

We show that differences in investors risk aversion can generate herd behavior in stock markets where assets are traded sequentially. This in turn prevents markets from being efficient in the sense that Þnancial market prices do not converge to the asset's fundamental value. The informational efficiency of the market depends on the distribution of the risky asset across risk averse agents. These results are obtained without introducing multidimensional uncertainty.

Suggested Citation

  • Jean-Paul Decamps & Stefano Lovo, 2002. "Risk Aversion and Herd Behavior in Financial Markets," Working Papers hal-00593657, HAL.
    • Handle: RePEc:hal:wpaper:hal-00593657
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    Cited by:

    1. Jean-Paul Decamps & Stefano Lovo, 2003. "Market Informational Inefficiency, Risk Aversion and Quantity Grid," Working Papers hal-00592016, HAL.
    2. Maria Grazia Romano, 2007. "Learning, Cascades, and Transaction Costs," Review of Finance, European Finance Association, vol. 11(3), pages 527-560.
    3. Lin, Mei-Chen, 2018. "The impact of aggregate uncertainty on herding in analysts' stock recommendations," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 90-105.
    4. J L Ford & David Kelsey & W Pang, 2005. "Ambiguity in Financial Markets: Herding and Contrarian Behaviour," Discussion Papers 05-11, Department of Economics, University of Birmingham.
    5. Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-156, Boston University - Department of Economics.
    6. Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - Working Papers Series WP2005-027, Boston University - Department of Economics.

    More about this item

    Keywords

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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