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Correlated Trades and Herd Behavior in the Stock Market

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  • Simon Jurkatis
  • Stephanie Kremer
  • Dieter Nautz

Abstract

Herd behavior is often viewed as a signi cant threat for the stability and eciency of nancial markets. This paper sheds new light on the relevance of herd behavior for observed correlation of trades. We introduce numerical simulations of a herd model to derive theory-guided predictions regarding the impact of various aspects of uncertainty on herding intensity. We test the predictions using a novel data set including all real-time transactions of institutional investors in the German stock market. In light of the model simulations, empirical results strongly suggest that the observed correlation of trades is mainly due to the common reaction of investors to new public information and should not be misinterpreted as herd behavior.

Suggested Citation

  • Simon Jurkatis & Stephanie Kremer & Dieter Nautz, 2012. "Correlated Trades and Herd Behavior in the Stock Market," SFB 649 Discussion Papers SFB649DP2012-035, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2012-035
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    References listed on IDEAS

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    Cited by:

    1. Balcilar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2014. "What drives herding in oil-rich, developing stock markets? Relative roles of own volatility and global factors," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 418-440.
    2. Ali, Sara & Badshah, Ihsan & Demirer, Riza, 2023. "Anti-herding by hedge funds and its implications for expected returns," Journal of Economic Behavior & Organization, Elsevier, vol. 211(C), pages 31-48.
    3. 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

    Herd Behavior; Institutional Trading; Correlated Trading; Model Simulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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