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http://ssrn.com/abstract=2080234
 
 

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Estimating a Structural Model of Herd Behavior in Financial Markets


Marco Cipriani


Federal Reserve Bank of New York

Antonio Guarino


University College London - Department of Economics and ELSE (Centre for Economic Learning and Social Evolution)

May 1, 2012

FRB of New York Staff Report No. 561

Abstract:     
We develop a new methodology for estimating the importance of herd behavior in financial markets. Specifically, 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 1995 stock market data for Ashland Inc., a company listed on the New York Stock Exchange. Herding occurs often and is particularly pervasive on certain days. In an information-event day, on average, 2 percent (4 percent) of informed traders herd-buy (sell). In 7 percent (11 percent) of information-event days, the proportion of informed traders who herd-buy (sell) is greater than 10 percent. Herding causes important informational inefficiencies, amounting, on average, to 4 percent of the asset's expected value.

Number of Pages in PDF File: 40

Keywords: herd behavior, market microstructure, structural estimation

JEL Classification: G14, D82, C13

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Date posted: June 9, 2012  

Suggested Citation

Cipriani, Marco and Guarino, Antonio, Estimating a Structural Model of Herd Behavior in Financial Markets (May 1, 2012). FRB of New York Staff Report No. 561. Available at SSRN: http://ssrn.com/abstract=2080234 or http://dx.doi.org/10.2139/ssrn.2080234

Contact Information

Marco Cipriani (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
Antonio Guarino
University College London - Department of Economics and ELSE (Centre for Economic Learning and Social Evolution) ( email )
Gower Street
London WC1E 6BT
United Kingdom
HOME PAGE: http://www.homepages.ucl.ac.uk/~uctpagu/
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