Estimating a Structural Model of Herd Behavior in Financial Markets
40 Pages Posted: 9 Jun 2012
There are 2 versions of this paper
Estimating a Structural Model of Herd Behavior in Financial Markets
Estimating a Structural Model of Herd Behavior in Financial Markets
Date Written: May 1, 2012
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.
Keywords: herd behavior, market microstructure, structural estimation
JEL Classification: G14, D82, C13
Suggested Citation: Suggested Citation
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