Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding

By Markus K. Brunnermeier | Go to book overview
Save to active project

6 Herding in Finance, Stock Market Crashes, Frenzies, and Bank Runs

The last chapter illustrated herding and informational cascades in a general context. This chapter shows that herding can also arise in financial markets and describes how herding behavior can be used to explain interesting empirical observations in finance. For example, herding can result in stock market crashes and frenzies in auctions. The stock market might still be rising prior to a crash if bad news is hidden and not reflected in the price. A triggering event can reveal this hidden news and lead to a stock market crash. Crashes and frenzies in auctions are described in greater detail in Section 6.1.3 .

Another example is the use of investigative herding models to show that traders have a strong incentive to gather the same short-run information. Trading based only on short-run information guarantees that the information is reflected in the price early enough before traders unwind their acquired positions. Section 6.2 illustrates the different reasons why traders might want to unwind their positions early and highlights the limits of arbitrage. It also throws new light on Keynes' comparison of the stock market with a beauty contest.

This short-run focus of investors not only affects the stock price but can also potentially affect corporate decision making. In Section 6.3 we cover two models which show that if investors focus on the short-run, and if corporate managers care about the stock market value, then corporate decision making also becomes short-sighted.

Finally, bank run models are closely linked to herding models. Seminal bank run papers are presented in Section 6.4 . While the early papers did not appeal to herding models directly, this connection is explicitly drawn in the more recent research on bank runs. Insights from the bank run literature can also help us get a better understanding of international financial crises. For example, the financial crisis in Southeast Asia in the late 1990s is often viewed as a big bank run.

-165-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited page

Bookmark this page
Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen
/ 244

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?