Rational Herd Behavior and the Globalization of Securities Markets

Duke Economics Working Paper No. 97-26

46 Pages Posted: 13 Aug 1998

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Date Written: March 6, 1998

Abstract

This paper shows that globalization of securities markets exacerbates the volatility of capital flows by strengthening incentives for herding behavior. This is a prediction of a mean-variance portfolio optimization model with imperfect information, in which investors acquire country-specific expertise at a fixed cost and incur variable reputational costs. The model produces equilibria in which incentives to confirm rumors decrease with globalization. Simulations based on equity markets data and country credit ratings suggest that herd behavior can induce large capital outflows from emerging markets.

JEL Classification: F30, F34, F36, G11, G15

Suggested Citation

Calvo, Guillermo A. and Mendoza, Enrique G., Rational Herd Behavior and the Globalization of Securities Markets (March 6, 1998). Duke Economics Working Paper No. 97-26, Available at SSRN: https://ssrn.com/abstract=114723 or http://dx.doi.org/10.2139/ssrn.114723

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Enrique G. Mendoza

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

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