Estimating a Structural Model of Herd Behavior in Financial Markets

Antonio Guarino and Marco Cipriani

No 2010/288, IMF Working Papers from International Monetary Fund

Abstract: We develop a new methodology to estimate the importance of herd behavior in financial markets: we build a structural model of informational herding that can be estimated with financial transaction data. In the model, rational herding arises because of information-event uncertainty. We estimate the model using data on a NYSE stock (Ashland Inc.) during 1995. Herding often arises and is particularly pervasive on some days. The proportion of herd buyers (sellers) is 2 percent (4 percent) and is greater than 10 percent in 7 percent (11 percent) of information-event days. Herding causes important informational inefficiencies, amounting, on average, to 4 percent of the expected asset value.

Keywords: WP; market maker (search for similar items in EconPapers)
Pages: 33
Date: 2010-12-01
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Estimating a Structural Model of Herd Behavior in Financial Markets (2014)
Working Paper: Estimating a structural model of herd behavior in financial markets (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2010/288

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