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Herding/Crowd

"Herding behaviour or 'following the trend' has frequently been observed in the housing market, in the stock market crash of 1987 (see Shiller (1990)) and in the foreign exchange market (Frankel and Froot, 1986 and Allen and Taylor, 1989b).
Cuthbertson [book]

[herd behaviour] "The behavior, although individually rational, produces group behavior that is, in a well-defined sense, irrational. This herdlike behavior is said to arise from an /information cascade/."
Shiller [book]

'The model implies that, under some conditions, investors will focus only on a subset of securities ("herding"), while neglecting other securities with identical exogenous characteristics.'
Hirshleifer, Subrahmanyam and Titman (1994)

"The average level of herding and momentum investing was statistically significant, but not particularly large."
Grinblatt, Titman and Wermers (1995)

"We construct simple models of a stock market, and argue that the large variations may be due to a crowd effect, where agents imitate each other's behavior.
Bak, Paczuski and Shubik (1996)

"An exact solution is presented to a model that mimics the crowding effect in financial markets which arises when groups of agents share information."
D'Hulst and Rodgers (1999)

"Our model provides a link between two well-known market phenomena: the heavy tails observed in the distribution of stock market returns on one hand and herding behavior in financial markets on the other hand."
"One of the interesting results of our model is that it predicts a relation between the fatness of the tails of asset returns as measured by their excess kurtosis and the degree of herding among market participants as measured by the parameter c."
Cont and Bouchaud (2000)

"We study whether herding can arise in a laboratory financial market in which agents trade sequentially. Agents trade an asset whose value is unknown and whose price is efficiently set by a market maker. We show that the presence of a price mechanism destroys the possibility of herding. Most agents follow their private information and prices converge to the fundamental value. This result contrasts with the case of a fixed price, where herding and cascades arise."
Cipriani and Guarino (2001)

"We review theory and evidence relating to herd behavior, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behavior of investors, firms, and analysts. We consider both incentives for parties to engage in herding or cascading, and the incentives for parties to protect against or take advantage of herding or cascading by others."
Hirshleifer and Teoh (2001)

See: 3.3.1 Herd Behavior
Johnsson, Lindblom and Platan (2002)

"herd behavior can generate financial contagion."
Cipriani and Guarino (2003)

Ten Important Papers

Bibliography