Title: Estimating a Structural Model of Herd Behavior in Financial Markets
Abstract: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.We develop a new methodology to estimate the importance of herd behavior in financial markets: we build a structural model of informational herding that can be estimated with financial transaction data.In the model, rational herding arises because of information-event uncertainty.We estimate the model using data on a NYSE stock (Ashland Inc.) during 1995.Herding often arises and is particularly pervasive on some days.The proportion of herd buyers (sellers) is 2 percent (4 percent) and is greater than 10 percent in 7 percent (11 percent) of information-event days.Herding causes important informational inefficiencies, amounting, on average, to 4 percent of the expected asset value.