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American Economic Review Vol. 104 No. 1 2014

Estimating a Structural Model of Herd Behavior in Financial Markets

Marco Cipriani1; Antonio Guarino2

1 New York Federal Reserve Bank, 33 Liberty Street, New York, NY 10045 (e-mail: ) · 2 Department of Economics, University College London, Gower Street, London WC1E 6BT, UK (e-mail: )

Abstract

We develop a new methodology to estimate herd behavior in financial markets. We build a 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 occurs often and is particularly pervasive on some days. On average, the proportion of herd buyers is 2 percent; that of herd sellers is 4 percent. Herding also causes important informational inefficiencies in the market, amounting, on average, to 4 percent of the asset's expected value.

DOI
10.1257/aer.104.1.224
Volume
104
Issue
1
Pages
224-251
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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