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Publication year
Multidimensional Uncertainty and Herd Behavior in Financial Markets.
Resource type
Authors/contributors
- Avery, Christopher (Author)
- Zemsky, Peter (Author)
Title
Multidimensional Uncertainty and Herd Behavior in Financial Markets.
Abstract
The authors study the relationship between asset prices and herd behavior, which occurs when traders follow the trend in past trades. When traders have private information on only a single dimension of uncertainty (the effect of a shock to the asset value), price adjustments prevent herd behavior. Herding arises when there are two dimensions of uncertainty (the existence and effect of a shock), but it need not distort prices because the market discounts the informativeness of trades during herding. With a third dimension of uncertainty (the quality of traders' information), herd behavior can lead to a significant, short-run mispricing. Copyright 1998 by American Economic Association.
Publication
American Economic Review
Volume
88
Issue
4
Pages
724-48
Date
1998-09
Citation
Avery, C., & Zemsky, P. (1998). Multidimensional Uncertainty and Herd Behavior in Financial Markets. American Economic Review, 88, 724–748.
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