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| Title: | | Estimating a structural model of herd behavior in financial markets  |
| Authors: | | Cipriani, Marco Guarino, Antonio |
| Issue Date: | | 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 |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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