Summary of Estimating a Structural Model of Herd Behavior in Financial Markets

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Estimating a Structural Model of Herd Behavior in Financial Markets summary
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Rating

8 Overall

8 Importance

9 Innovation

7 Style


Recommendation

Researchers Marco Cipriani and Antonio Guarino present an innovative approach to the study of “herding,” traders’ tendency to base their transactions on market movements even if those actions contradict the traders’ information. Cipriani and Guarino’s model is the first to blend “social learning” theories of motivation with trading statistics to derive an understanding of why traders act as they do. getAbstract suggests their scholarly work to academics, regulators and financial services professionals interested in cutting-edge research on stock market behavior.

In this summary, you will learn

  • What “herding” is and why it is significant in financial markets,
  • What causes traders’ herding behavior, and
  • Why herding distorts securities prices and impedes the efficient flow of market data.
 

About the Authors

Marco Cipriani works at the Federal Reserve Bank of New York. Antonio Guarino is a reader at the University College London.

 

Summary

Securities traders “herd” when they buy or sell an asset based on others’ prior trades of that security. They conduct such transactions even when their “private information” contradicts what they see happening in the market. Herders “buy after the price has risen or…sell after the price has fallen.” ...

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