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Herd behavior and contagion in financial markets

Cipriani, M.; Guarino, A.; (2003) Herd behavior and contagion in financial markets. (ELSE Working Papers 70). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Abstract

Imitative behavior and contagion are well-documented regularities of financial markets. We study whether they can occur in a two-asset economy where rational agents trade sequentially. When traders have gains from trade, informational cascades arise and prices fail to aggregate information dispersed among traders. During a cascade all informed traders with the same preferences choose the same action, i.e., they herd. Moreover, herd behavior can generate financial contagion. Informational cascades and herds can spill over from one asset to the other, pushing the price of the other asset far from its fundamental value.

Type: Working / discussion paper
Title: Herd behavior and contagion in financial markets
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php#2003
Language: English
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14636
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