Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

35 Pages Posted: 15 Jun 2001 Last revised: 31 Aug 2001

See all articles by Kenneth Froot

Kenneth Froot

National Bureau of Economic Research (NBER); Harvard University - Business School (HBS)

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 1990

Abstract

Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e, can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals. These equilibria are informationally inefficient.

Suggested Citation

Froot, Kenneth and Scharfstein, David S. and Stein, Jeremy C., Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation (February 1990). NBER Working Paper No. w3250. Available at SSRN: https://ssrn.com/abstract=273581

Kenneth Froot (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Harvard University - Business School (HBS) ( email )

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David S. Scharfstein

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
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617-496-8443 (Fax)

HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeremy C. Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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