Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals

30 Pages Posted: 1 Jul 2008

See all articles by Antonio Guarino

Antonio Guarino

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

Marco Cipriani

Federal Reserve Bank of New York

Date Written: June 2008

Abstract

We study herd behavior in a laboratory financial market with financial market professionals. We compare two treatments, one in which the price adjusts to the order flow so that herding should never occur, and one in which event uncertainty makes herding possible. In the first treatment, subjects herd seldom, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of subjects, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, the proportion of herding decisions increases, but not as much as theory suggests; moreover, contrarianism disappears altogether.

Keywords: Working Paper

Suggested Citation

Guarino, Antonio and Cipriani, Marco, Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals (June 2008). IMF Working Papers, Vol. , pp. 1-28, 2008. Available at SSRN: https://ssrn.com/abstract=1154299

Antonio Guarino (Contact Author)

University College London - Centre for Economic Learning and Social Evolution (ELSE) ( email )

Gower Street
London WC1E 6BT
United Kingdom

HOME PAGE: http://www.homepages.ucl.ac.uk/~uctpagu/

Marco Cipriani

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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