Stock market bubble and herding

Stock market bubble consequences

The change of an investing attitude will then represent the excess demand of stock, therefore illustrating the dynamic equation of financial system and price volatility. Researchers either introduced their own model to investigate managers based on reputation such as funds managers, which assumed that the action of a manager that ignore their private signal to follow others will increase the price volatility. In other words, if others are buying, you must do the same, even if stocks are overvalued. Evolution path from the normal phase to the herd phase. The abscissa is time, which means different trading period, and the ordinate is the stock price. Cascade trading behavior in Treatment II. That is to say, there was information asymmetry to some extent in the second treatment. For more information see our Cookie Policy.

Lakonishok argued that because most of the market was occupied by institutional investors, their sense of ration will simply neutralize those irrational markups made by individual investors, therefore establishing market stability.

Based on this model, it is not difficult for to find that the herding effect caused by information asymmetry is scientifically based and persuasive.

The fear of missing out on a profitable investment idea is often the driving force behind herd instinct. Updated Aug 14, What is Herd Instinct? Some believes that herding effect will lead to a higher price volatility, there are two general direction of such researchers: theoretical models and experimental tests.

Besides, the experimenters introduced a new strategy method.

types of herding in finance

Evolution path from the normal phase to the herd phase. Non-Linear Dynamic Model Researchers of herding effect have given different conclusions of whether the herding effect will increase stock prices volatility.

The implication is that Montier has a history of being early but correct, which is somewhat disingenuous — he has been bearish on this bull market since at least

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Herd mentality is driving stock markets