HERD BEHAVIOR AND AGGREGATE FLUCTUATIONS IN FINANCIAL MARKETS

We present a simple model of a stock market where a random communication structure between agents generically gives rise to 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.

• Publication year

  1997

• Venue

  Macroeconomic Dynamics

• Publication date

  1997-12-30

• Fields of study

  Physics, Economics

• Identifiers
  DOI 10.1017/S1365100500015029arXiv cond-mat/9712318
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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