Herd behavior and aggregate fluctuations in financial markets

Rama Cont and Jean-Philippe Bouchaud
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Rama Cont: Science & Finance, Capital Fund Management
Jean-Philippe Bouchaud: Science & Finance, Capital Fund Management

No 500028, Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management

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.

JEL-codes: G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 1997-12
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Published in Journal of Macroeconomic Dynamics, 4 (2), 170 (2000)

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Persistent link: https://EconPapers.repec.org/RePEc:sfi:sfiwpa:500028

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