Herd Behavior and Aggregate Fluctuations in Financial Markets

30 Pages Posted: 10 Feb 1998

See all articles by Rama Cont

Rama Cont

University of Oxford

Jean-Philippe Bouchaud

Capital Fund Management

Date Written: December 1997

Abstract

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

JEL Classification: D84, E32, G19

Suggested Citation

Cont, Rama and Bouchaud, Jean-Philippe, Herd Behavior and Aggregate Fluctuations in Financial Markets (December 1997). Available at SSRN: https://ssrn.com/abstract=58468 or http://dx.doi.org/10.2139/ssrn.58468

Rama Cont (Contact Author)

University of Oxford ( email )

Mathematical Institute
Oxford, OX2 6GG
United Kingdom

HOME PAGE: http://https://www.maths.ox.ac.uk/people/rama.cont

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

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