Herd behavior and aggregate fluctuations in financial markets
Abstract
We present a simple model of a stock market where a random communication structure between agents gives rise to a heavy tails in the distribution of stock price variations in the form of an exponentially truncated power-law, similar to distributions observed in recent empirical studies of high frequency market data. 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. In particular, our study suggests a relation between the excess kurtosis observed in asset returns, the market order flow and the tendency of market participants to imitate each other.
Keywords
Cite
@article{arxiv.cond-mat/9712318,
title = {Herd behavior and aggregate fluctuations in financial markets},
author = {Rama Cont and Jean-Philippe Bouchaud},
journal= {arXiv preprint arXiv:cond-mat/9712318},
year = {2014}
}
Comments
Minor modifications in text, references added. 29 pages, typesetted using LATEX