Financial Crises as Herds: Overturning the Critiques

Does the stock market drive herd behavior in commodity futures markets?

“…Studies including Shleifer and Summers (1990), Avery and Zemsky (1998) and Chari and Kehoe (2004) propose an information based theory for herding where individual investors follow the signals from the trades of more informed agents with better access to information compared to individual investors. Devenow and Welch (1996) suggest that managers in an imperfectly informed market may prefer either to 'hide in the herd' not to be evaluable, or to 'ride the herd' in order to prove quality.…”

Investor herds and regime-switching: Evidence from Gulf Arab stock markets

“…However, one must note that these explanations have generally been applied to developed markets and may not fit very closely with a possible herding behavior in developing stock markets, including those in the GCC countries. One strand of literature including Shleifer and Summers (1990), Froot et al (1992), Avery and Zemsky (1998) and Chari and Kehoe (2004) suggest that individual investors prefer to follow the actions of more informed traders believing that the actions of informed traders reveal useful information which may not be accessible to individual investors. On the other hand, studies including Banerjee (1992), Bikhchandani et al (1992) and Shiller (2002) suggest that informational cascades, where investors' inferences on what other investors' actions might imply, create behavioral trends.…”

To be good or to be better: asset managers’ attitudes towards herding

“…Moreover, this behavior increases the danger of contagion of financial crises (see e.g. Chari and Kehoe, 2003, Borensztein and Gelos, 2003, and Calvo and Mendoza, 2000. Due to these negative consequences it is important to know possible triggers of herd behavior.…”