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Herding in financial markets: Bridging the gap between theory and evidence

Author

Listed:
  • Boortz, Christopher
  • Jurkatis, Simon
  • Kremer, Stephanie
  • Nautz, Dieter
Abstract
Due to data limitations and the absence of testable, model-based predictions, theory and evidence on herd behavior are only loosely connected. This paper attempts to close this gap in the herding literature. From a theoretical perspective, we use numerical simulations of a herd model to derive new, theory-based predictions for aggregate herding intensity. From an empirical perspective, we employ high-frequency, investor-specific trading data to test the theory-implied impact of information risk and market stress on herding. Confirming model predictions, our results show that herding intensity increases with information risk. In contrast, herding measures estimated for the nancial crisis period cannot be explained by the herd model. This suggests that the correlation of trades observed during the crisis is mainly due to the common reaction of investors to new public information and should not be misinterpreted as herd behavior.

Suggested Citation

  • Boortz, Christopher & Jurkatis, Simon & Kremer, Stephanie & Nautz, Dieter, 2013. "Herding in financial markets: Bridging the gap between theory and evidence," SFB 649 Discussion Papers 2013-036, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
  • Handle: RePEc:zbw:sfb649:sfb649dp2013-036
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    References listed on IDEAS

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    4. Poeschel, Friedrich, 2012. "Assortative matching through signals," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62061, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Herd Behavior; Institutional Trading; Model Simulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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