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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

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CiteScore 2018: 0.24

SCImago Journal Rank (SJR) 2018: 0.163
Source Normalized Impact per Paper (SNIP) 2018: 0.186

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Herd Behavior and Contagion in Financial Markets

Marco Cipriani / Antonio Guarino
Published Online: 2008-10-06 | DOI: https://doi.org/10.2202/1935-1704.1390

We study a sequential trading financial market where there are gains from trade, that is, where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals.

Keywords: herd behavior; financial contagion; social learning; informational cascades; financial crises

About the article

Published Online: 2008-10-06

Citation Information: The B.E. Journal of Theoretical Economics, Volume 8, Issue 1, ISSN (Online) 1935-1704, DOI: https://doi.org/10.2202/1935-1704.1390.

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