The effect of rating agencies on herd behaviour

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper purports to provide some evidence on the effect of rating agencies on herding in financial markets. By means of a laboratory experiment, we investigate the effect and interaction between private and public information. Previous experiments showed that lemmings behaviour can survive in a market context where information is private (Hey and Morone, 2004), and that an experimental market can be very volatile and not efficient in transmitting information (Alfarano et al., 2006). We study experimentally, if socially undesirable behaviour -that survives in a market contestmay be eliminated owing to the presence of rating agencies. Terms of use: Documents inJEL classification: C91, D82, D83. Keywords: herd behaviour, informational cascades, rating agency, bubble. † We would like to thank the University of Bari for funding the experiments reported in this paper. The experiments were run at the laboratory of ESSE at the University of Bari. We are grateful to Paola Buizza for valuable assistance in running the experiments.

Asset markets in the lab: A literature review

“…Treatments differ in the precision of both private and public signals. Ferri and Morone (2014) show that the herding likelihood is negatively related with an increase in the accuracy of public information. Furthermore, the public signal also accelerates the price discovery process, producing a benefit in terms of market efficiency.…”

“…some subjects are insiders and some others are uninformed (Plott and Sunder, 1982;Camerer and Weigelt, 1991;Brandouy et. al., 2000;Noussair and Yilong Xu, 2015); where subjects can buy information during the trading period (Hey and Morone, 2004;Ferri and Morone, 2014;Alfarano et al, 2015); where a fixed amount of partially trustable information is exogenously provided to all subjects before the trading period starts (Barreda et al, 2016a, 2016b).…”

Credit Rating Changes and Stock Market Reaction in the Kingdom of Bahrain

“…Credit rating agencies, such as Moody's Investors Service or Standard & Poor's, play an important role in the financial markets and do typically impact investors' decisions (Gropp & Richards, 2001;Ferri & Morone, 2008). They also influence market prices of financial instruments that are available as investment vehicles for investors.…”

Single vs. multiple disclosures in an experimental asset market with information acquisition

“…See, for example,Ackert et al (2002);Hey and Morone (2004);Ferri and Morone (2008);Deck et al (2013);Fellner and Theissen (2014);Page and Siemroth (2017) andHalim et al (2019).4 10 markets out of the 20 markets included in the Single disclosure treatment are populated by 10 traders.5 Earnings, as well as asset value and dividend, during the experiments were designated in experimental currency units (ECU) and converted into e at the end of the session.…”