Affiliation:
1. New York Federal Reserve Bank, 33 Liberty Street, New York, NY 10045 (e-mail: )
2. Department of Economics, University College London, Gower Street, London WC1E 6BT, UK (e-mail: )
Abstract
We develop a new methodology to estimate herd behavior in financial markets. We build a 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 occurs often and is particularly pervasive on some days. On average, the proportion of herd buyers is 2 percent; that of herd sellers is 4 percent. Herding also causes important informational inefficiencies in the market, amounting, on average, to 4 percent of the asset's expected value. (JEL C58, D82, D83, G12, G14)
Publisher
American Economic Association
Subject
Economics and Econometrics
Cited by
80 articles.
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