Transmission of Information and Herd Behavior: an Application to Financial Markets

Details Transmission of Information and Herd Behavior: an Application to Financial Markets Transmission of Information and Herd Behavior: an Application to Financial Markets

1999-08-04

arxiv.org/abs/cond-mat/9908069v4

Phys. Rev. Lett. 85, 5659-5662 (2000)

Physics

Condensed Matter

4 pages, 4 figures. Revised version. Accepted for publication in Phys. Rev. Lett. For related material visit http://www.nbi.dk

Scientific paper

10.1103/PhysRevLett.85.5659

We propose a model for stochastic formation of opinion clusters, modelled by an evolving network, and herd behaviour to account for the observed fat-tail distribution in returns of financial-price data. The only parameter of the model is h, the rate of information dispersion per trade, which is a measure of herding behavior. For h below a critical h* the system displays a power-law distribution of the returns with exponential cut-off. However for h>h* an increase in the probability of large returns is found, and may be associated to the occurrence of large crashes.

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