Irrational exuberance and herding in financial markets

Arbeitspapier

In the context of a two-state, two-trader financial market herd model introduced by Avery and Zemsky (1998) we investigate how informational ambiguity in conjunction with waves of optimism and pessimism affect investor behavior, social learning and price dynamics. Without ambiguity, neither herding nor contrarianism is possible. If there is ambiguity and agents have invariant ambiguity preferences, only contrarianism is possible. If on the other hand ambiguity is high and traders become overly exuberant (or desperate) as the asset price surges (or plummets), we establish that investor herding may drive prices away from fundamentals with economically relevant probability.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2016-016

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Asymmetric and Private Information; Mechanism Design ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: Social Learning ; Herding ; Contrarianism ; (Partial) Informational Cascade ; Ambiguity ; Choquet Expected Utility ; NEO-Additive Capacities

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Boortz, Christopher
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/146185
• Last update: 10.03.2025, 11:43 AM CET