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- Will That New Product Be a Success?
- Herd Behavior in Financial Markets
- Domestic Bond Markets and Inflation
- Why Warren Buffett is $72 billion richer than you
- Real Wages Are Rising
- Gold Turns Negative Year-to-Date; Stocks to Follow
- 10 Tuesday AM Reads
- Flowchart: Which Apple Watch is For You?
| Will That New Product Be a Success? Posted: 11 Mar 2015 03:30 AM PDT |
| Herd Behavior in Financial Markets Posted: 11 Mar 2015 02:00 AM PDT Herd Behavior in Financial Markets
Over the last twenty-five years, there has been a lot of interest in herd behavior in financial markets—that is, a trader's decision to disregard her private information to follow the behavior of the crowd. A large theoretical literature has identified abstract mechanisms through which herding can arise, even in a world where people are fully rational. Until now, however, the empirical work on herding has been completely disconnected from this theoretical analysis; it simply looked for statistical evidence of trade clustering and, when that evidence was present, interpreted the clustering as herd behavior. However, since decision clustering may be the result of something other than herding—such as the common reaction to public announcements—the existing empirical literature cannot distinguish "spurious" herding from "true" herd behavior. In this post, we describe a novel approach to measuring herding in financial markets, which we employed in a recently published paper. We develop a theoretical model of herd behavior that, in contrast to the existing theoretical literature, can be brought to the data, and we show how to estimate it using financial markets transaction data. The estimation strategy allows us to distinguish "real" herding from "spurious herding," or the simple clustering of trading behavior. Our approach allows researchers to gauge the importance of herding in a financial market and to assess the inefficiency in the process of price discovery that herding causes. The Model How does herding occur in this market? That is, when is it ever rational for a trader who has information on the asset value to trade against her own information in order to follow the behavior of the crowd? Let's say a series of sells arrives to the market. What would an informed trader whose information points to an upward movement in the asset's fundamental value do? First of all, she knows that something happened in the market to change the asset's fundamental value; otherwise she would not be informed. Additionally, she realizes that although her own private information says otherwise, the sells that have already occurred likely reflect the fact that other informed traders received negative news about the asset value. Since many sells arrived to the market, presumably reflecting the fact that many people received bad information about the asset value, the trader also realizes that the negative information reflected in those trades is likely to be more valuable than her own. Therefore, it is rational for her to sell and follow the crowd by going against her own information. All subsequent traders with good information on the asset value will be in a similar position as she is, thus starting a herd. Because traders who herd rationally decide not to follow their own information, the aggregation of private information in the market is impaired. As a result, price discovery—the convergence of an asset's price to its fundamental value—is slower. The Data As an illustration, in the paper, we measure the importance of herd behavior using transaction data of Ashland Inc., an NYSE-traded stock, in 1995. We find that herding on Ashland Inc. occurred quite often: on average, the proportion of herd buyers was 2 percent and that of herd sellers was 4 percent. Additionally, we find that not only did herding occur but also it was at times misdirected (that is, herd buying in a day when the asset's fundamental value declined and herd selling in a day when the asset's fundamental value increased). On average, in a bad-event day, the proportion of herd buyers was 1 percent; in a good-event day, the proportion of herd sellers was 2 percent. Because agents herd and do not follow the information they have, the process of price discovery slows down: on average, we find that the price was 4 percent further away from its fundamental value than it would otherwise have been. Disclaimer
Antonio Guarino is a professor of economics at University College London. http://libertystreeteconomics.newyorkfed.org/2015/03/herd-behavior-in-financial-markets.html#.VP2K30bIg7J  |
| Domestic Bond Markets and Inflation Posted: 11 Mar 2015 02:00 AM PDT  |
| Why Warren Buffett is $72 billion richer than you Posted: 10 Mar 2015 12:30 PM PDT
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| Posted: 10 Mar 2015 09:30 AM PDT
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| Gold Turns Negative Year-to-Date; Stocks to Follow Posted: 10 Mar 2015 07:30 AM PDT Equity markets started off this year by falling. They rallied in February, working their way back into the green. The Standard & Poor’s 500 Index now is up about 1 percent for the year. Gold has traveled the opposite path: The yellow metal began at about $1,175 an ounce. By Jan. 23, it had rallied to almost $1,300. In February, gold slipped about $60 and the fall continued this month. Gold now is down about 1.6 percent year-to-date and it wouldn’t be a surprise if the precious metal fell more this month. "March has a history of being the worst" month for gold, according to Bloomberg. During the past four decades, on average, bullion futures decline 1 percent in March. "Prices fell 65 percent of the time, more than any other month."  The reason gold prices can’t seem to gain any traction are many: Job creation has been robust, inflation is low and the Federal Reserve is widely expected to begin the process of easing back on monetary accommodation — strengthening the dollar and further reducing gold’s appeal. As we noted late last year, the gold narrative has failed. The promised hyperinflation that was supposed to send gold soaring never arrived. Instead, we had disinflation, with a threat of global deflation. Other stories were posited by traders who were long on hope but short on cogent analysis . . . Continues here
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| Posted: 10 Mar 2015 04:30 AM PDT Friday’s Jobs-driven sell off gave way to Monday’s rally, which has led to todays red futures, and . . . and the beat goes on. Oh, and our morning train reads:
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| Flowchart: Which Apple Watch is For You? Posted: 10 Mar 2015 03:45 AM PDT |
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