Notes on "Herd behavior in financial markets: an experiment with financial market professionals" (Cipriani, M.; Guarino, A.)

Herd behavior in financial markets: an experiment with financial market professionals

Cipriani, M.; Guarino, A.

Journal of the European Economic Association , 7 (1) pp. 206-233. (2009)

2009-03

the extent to which trading in financial markets is characterised by herd behaviour 

herding may have both on financial markets’ stability and on the markets’ ability to achieve allocative and informational efficiency

Surveys:

Gale 1996

Hirshleifer and Tech 2003

Charley 2004

Vives 2008

To test herding models directly with data from financial markets:

sample consists of financial market professionals

the existing literature has tested for the presence of herding in a market where, according to the theory, herding should never arise

use a strategy method-like procedure that could help to detect herding behaviour directly

Treatment I: subjects should use their private information and never herd

Treatment II: herding becomes optimal because of event uncertainty

The theoretical model of Avery and Zemsky (1998)

similar to that of Glisten and Milgrom (1985) and Easley and O’Hara (1987)

An informed trader engages in cascade behaviour if he chooses the same action independently of the private signal. If the chosen action conforms to the majority of past trades the trader engages in herd behaviour. If the chosen action goes against the majority of past trades the trader engages in contrarian behaviour.

the challenge for future research is twofold. On the one hand, the existing experimental results offer suggestions for research with field data, which should study whether the behaviours observed in the laboratory are present in actual financial markets. On the other hand, more theoretical work is needed to capture the behaviour that the present model is unable to predict, such as contrarianism and abstention from trading activity.