Estimating a Structural Model of Herd Behavior in Financial Markets
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Summary:
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.
Series:
Working Paper No. 2010/288
Subject:
Asset prices Asset valuation Stock markets Stocks Trade balance
English
Publication Date:
December 1, 2010
ISBN/ISSN:
9781455211692/1018-5941
Stock No:
WPIEA2010288
Pages:
33
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