NDLI: Estimating a structural model of herd behavior in financial markets, american economic review forthcoming (2013).

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Estimating a structural model of herd behavior in financial markets, american economic review forthcoming (2013).

Content Provider	CiteSeerX
Author	Cipriani, Marco Guarino, Antonio Gale, Glas Engle, Robert Flinn, Christopher Nesheim, Lars Pavoni, Nicola
Abstract	We develop and estimate a structural model of informational herd-ing in nancial markets. In the model, a sequence of traders exchanges an asset with a market maker. Herd behavior, i.e, the choice to fol-low the actions of ones predecessors, can arise as the outcome of a rational choice because there are multiple sources of asymmetric in-formation in the economy. We estimate the model using transaction data on a NYSE stock in the rst quarter of 1995. We are able to detect the periods of the trading day in which traders herd, and nd that they account for 15 % of trading periods. Moreover, we nd that in more than 10 % of days, herding accounts for more than 30 % of all trading activity. Finally, by simulating the model, we estimate the informational ine ¢ ciency generated by herding. On average, because of herding, the actual price is 0:4 % distant from the full informtion price. Moreover, in 2:8 % of trading periods, the distance between actual and full information prices is larger than 10%. This suggests that the informational ine ¢ ciency caused by herding, although not extremely large on average, is very signicant in certain days.
File Format	PDF
Publisher Date	2013-01-01
Access Restriction	Open
Subject Keyword	Structural Model Herd Behavior Financial Market American Economic Review Trading Period Informational Ine Ciency Full Informtion Price Informational Herd-ing Trader Exchange Trading Activity Asymmetric In-formation Market Maker Certain Day Multiple Source Full Information Price Rst Quarter Actual Price Rational Choice One Predecessor Transaction Data Nancial Market Nyse Stock Signi Cant Trading Day
Content Type	Text

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