Herd Behavior and Contagion in Financial Markets

@article{Cipriani2008HerdBA,
  title={Herd Behavior and Contagion in Financial Markets},
  author={M. Cipriani and Antonio Guarino},
  journal={The B.E. Journal of Theoretical Economics},
  year={2008},
  volume={8}
}
We study a sequential trading financial market where there are gains from trade, that is, 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, following the market (herding) or going against it (contrarianism). We also study financial contagion… Expand
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