Herd behavior bubbles and crashes

Conclusion By Nathan Reiff One of the most notorious financial events in the past several years was the financial crisis ofwhich involved a real estate bubble which burst.

Herd behavior bubbles and crashes

Hire Writer Technically, this means that there is positive autocorrelation over short horizons and negative autocorrelation over longer intervals in the data.

A possible explanation is speculative overshooting of the price trend which is gradually eliminated beyond some range. Potherb and Summers, too, repose fads models to understand this regularity. The Herd behavior bubbles and crashes for behavioral models Of financial markets was already made emphatically by Sheller iiiwhere also some hints are given concerning relevant material in other sciences.

Another important author to be mentioned here is Kindergarten The perceptive comments and suggestions of the referees are also gratefully acknowledged. L Following these authors, the aim in this paper is to construct an elementary model of stock market dynamics which explicitly includes contagion of opinion and behavior and to offer a behavioral explanation for the empirical findings discussed above.

This line of research is characterized by the introduction of traders which in some way deviate from a perfectly rational scheme of behavior.

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These agents appear as naive traders, noise traders or chartists. Some authors Delano et al. The way in which this paper aims at contributing to this body of literature is that the psychological factors which influence the behavior Of unsophisticated traders will be modeled explicitly.

This means that a formalism is introduced which describes the formation of expectations by those who are not fully informed about fundamentals. These expectations depend mainly perhaps among other things on the behavior and expectations of others. Thus, what will be modeled is the process of mutual mimetic contagion among speculators.

CiteSeerX — Citation Query Herd behavior, bubbles and crashes

Conditions are given under which contagion may lead to the existence of positive or negative bubbles, I. Stationary states where actual prices exceed fundamental values or are below them. Bull and bear markets are, however, not stationary in reality.

Bubbles grow up and burst, and periods where assets are undervalued or overvalued do not last forever.

Herd behavior, bubbles and crashes (1995)

So it seems to be more appropriate to model them as transient phenomena. Section Ill, therefore, develops a model where switches been bull and bear markets occur periodically. The reason for this oscillation is that we allow additional econometricians to influence the process of opinion formation.

To be precise, a slowly changing optimistic or pessimistic bias is 1 The following quotation from the preface to the second edition seems to be characteristic his position: Full rationality] is infuriating… It is time that economics accept reality.

K Royal Economic Society This content downloaded from This variable for the overall disposition of the market depends on the only hard information available to naive speculators: Hence, speculators are not simply blind followers of the crowd: The consequence is that once the pool of additional buyers in a bull market is exhausted and price increases diminish a gradual erosion of confidence in the validity of bullish beliefs occurs.

Herd behavior bubbles and crashes

This ends with a crash, and the game is repeated with reversed signs. Section IV concludes and points to possible extensions of the present approach.

In the absence of any piece of such information they serially have to rely on what can be observed on the market as the only base of their actions. If we accept this extreme assumption as an accurate description of the information set of a considerable part of traders, then a first conclusion could be that a speculator will be more willing to buy sell if he sees most traders eying selling.

As already mentioned such conjectures may be false, but nevertheless may lead to self-reinforcing fluctuations.

A Behavioral Model of Bubbles and Crashes

The underlying process of contagion will be formalized by referring to the concept of synergistic originally developed in elementary particle and laser physics see e. Hake, and applied to various problems from the social sciences by Woodlice and Hag among others.

Infection of attitudes will now be made explicit:Herd Behaviour, Bubbles and Crashes Created Date: Z. This paper attempts to formalize herd behavior or mutual mimetic contagion in speculative markets.

The emergence of bubbles is explained as a self-organizing process of infection among traders leading to equilibrium prices which deviate from fundamental values. It is postulated furthermore that the. Request PDF on ResearchGate | Herd Behaviour, Bubbles and Crashes | This paper attempts to formalize herd behavior or mutual mimetic contagion in speculative markets.

The emergence of . CHARACTERISTICS OF BUBBLES AND CRASHES Bubbles and crashes have a history that goes back at least to the seventeenth century (MacKay ). Some writers have suggested that bubbles show common characteristics.

Abstract. The aim of this paper is to propose a new model of bubbles and crashes to elucidate a mechanism of bubbles and subsequent crashes. We consider an asset market in which the risky assets into two classes, the risky asset, and the risk-free asset are traded.

We propose a new model of bubbles and crashes. We divide the risky assets into two classes, the bubble asset and the non-bubble asset, and the risk-free asset.

which follows the behavior getting a majority, occurs when the number of noise-traders increases, and their herd behavior gives cause to a bubble, and their momentum .

A behavioral model of bubbles and crashes - Munich Personal RePEc Archive