Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60944
Authors: 
Cipriani, Marco
Guarino, Antonio
Year of Publication: 
2012
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 561
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.
Subjects: 
herd behavior
market microstructure
structural estimation
JEL: 
G14
D82
C13
Document Type: 
Working Paper

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