In economics and finance, rational herding is a situation in which market participants react to information about the behavior of other market agents or participants rather than the behavior of the market, and the fundamental transactions. [1] [2]
An account cited that rational herding is an unintended consequence of the string of Federal Reserve interventions that mandated greater transparency of others' trade activities starting in 2007. [3] Due to crisis environment and uncertainty in the market fundamentals, investors started to use the Federal Reserve's information found in its policy pronouncements. [3]
Rational herding in financial markets can take place because some investors believe others to be better informed than themselves, and follow them, disregarding their own information or market fundamentals. [4] This is based on the idea that if information is costly for an uninformed actor, his ignorance is rational and that, if he cannot afford the information, there is a potential benefit of following another player who can pay for such information. [5]
Reliance on rational herding can be a source of instability in financial markets. [1] There are also scholars who note that rational herding is still based on anecdotal observations and that there is lack of empirical evidence due to the way the so-called "herding literature" focuses on the price or investment patterns, information that is readily available. [6]
References
- ^ a b International economic policy review, Volume 2 by International Monetary Fund 2001 ISBN 1-58906-030-X page 100 [1]
- ^ Andrea Devenow and Ivo Welch Rational herding in financial economics in European Economic Review Volume 40, Issues 3-5, April 1996, Pages 603-615 [2]
- ^ a b Fung, Hung-Gay; Tse, Yiuman (2013). International Financial Markets. Bingley, UK: Emerald Group Publishing. p. 159. ISBN 9781781903117.
- ^ Handbook of Behavioral Finance edited by Brian Bruce 2010 ISBN 1-84844-651-9 page 103 [3]
- ^ Baker, H. Kent; Nofsinger, John R. (2010). Behavioral Finance: Investors, Corporations, and Markets. Hoboken, NJ: John Wiley & Sons. pp. 459. ISBN 9780470499115.
- ^ Menkhoff, Lukas; Tolksdorf, Norbert (2001). Financial Market Drift: Decoupling of the Financial Sector from the Real Economy?. Berlin: Springer-Verlag. p. 165. ISBN 3540411658.
 | This article about the economy is a stub. You can help Wikipedia by expanding it. |
 | This psychology-related article is a stub. You can help Wikipedia by expanding it. |
In economics and finance, rational herding is a situation in which market participants react to information about the behavior of other market agents or participants rather than the behavior of the market, and the fundamental transactions. [1] [2]
An account cited that rational herding is an unintended consequence of the string of Federal Reserve interventions that mandated greater transparency of others' trade activities starting in 2007. [3] Due to crisis environment and uncertainty in the market fundamentals, investors started to use the Federal Reserve's information found in its policy pronouncements. [3]
Rational herding in financial markets can take place because some investors believe others to be better informed than themselves, and follow them, disregarding their own information or market fundamentals. [4] This is based on the idea that if information is costly for an uninformed actor, his ignorance is rational and that, if he cannot afford the information, there is a potential benefit of following another player who can pay for such information. [5]
Reliance on rational herding can be a source of instability in financial markets. [1] There are also scholars who note that rational herding is still based on anecdotal observations and that there is lack of empirical evidence due to the way the so-called "herding literature" focuses on the price or investment patterns, information that is readily available. [6]
References
- ^ a b International economic policy review, Volume 2 by International Monetary Fund 2001 ISBN 1-58906-030-X page 100 [1]
- ^ Andrea Devenow and Ivo Welch Rational herding in financial economics in European Economic Review Volume 40, Issues 3-5, April 1996, Pages 603-615 [2]
- ^ a b Fung, Hung-Gay; Tse, Yiuman (2013). International Financial Markets. Bingley, UK: Emerald Group Publishing. p. 159. ISBN 9781781903117.
- ^ Handbook of Behavioral Finance edited by Brian Bruce 2010 ISBN 1-84844-651-9 page 103 [3]
- ^ Baker, H. Kent; Nofsinger, John R. (2010). Behavioral Finance: Investors, Corporations, and Markets. Hoboken, NJ: John Wiley & Sons. pp. 459. ISBN 9780470499115.
- ^ Menkhoff, Lukas; Tolksdorf, Norbert (2001). Financial Market Drift: Decoupling of the Financial Sector from the Real Economy?. Berlin: Springer-Verlag. p. 165. ISBN 3540411658.
|
| This article about the economy is a stub. You can help Wikipedia by expanding it. |
|
| This psychology-related article is a stub. You can help Wikipedia by expanding it. |