Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals

June 1, 2008

Preview Citation

Format: Chicago

Marco Cipriani, and Antonio Guarino. Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study herd behavior in a laboratory financial market with financial market professionals. We compare two treatments, one in which the price adjusts to the order flow so that herding should never occur, and one in which event uncertainty makes herding possible. In the first treatment, subjects herd seldom, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of subjects, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, the proportion of herding decisions increases, but not as much as theory suggests; moreover, contrarianism disappears altogether.

Subject: Asset valuation, Education, Gender, Securities markets, Trade balance

Keywords: Asset value, Cascade trading behavior, Market maker, Noise trader, Trade imbalance, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/141
Stock No:

WPIEA2008141
ISBN:

9781451869996
ISSN:

1018-5941

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