Estimating a Structural Model of Herd Behavior in Financial Markets

Guarino, Antonio; Cipriani, Marco

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Estimating a Structural Model of Herd Behavior in Financial Markets

IMF Working Paper No. 10/288

34 Pages Posted: 1 Feb 2011

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

There are 2 versions of this paper

Date Written: December 2010

Abstract

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.

Keywords: Asset prices, Capital markets, Economic models, Public information, Stock markets

Suggested Citation: Suggested Citation

Guarino, Antonio and Cipriani, Marco, Estimating a Structural Model of Herd Behavior in Financial Markets (December 2010). IMF Working Paper No. 10/288, Available at SSRN: https://ssrn.com/abstract=1751401