Herd Behavior and Contagion in Financial Markets

  title={Herd Behavior and Contagion in Financial Markets},
  author={Marco Cipriani and Antonio Guarino},
We study a sequential trading financial market where there are gains from trade, i.e., where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, either following the market (herding) or going against it (contrarianism). We also study financial… CONTINUE READING
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