The link below, and perhaps more importantly, the links referenced, provide an up to date review of the literature on the long held wish of the academic community to define and parameterise models (ahem) that describe 'herding'. There is enough in there, in my opinion, for one to finally say "it's a bunch of non predictive claptrap" or "huh!, I might test that":

Herd Behavior in Financial Markets:

Over the last twenty-five years, there has been a lot of interest in herd behavior in financial markets—that is, a trader's decision to disregard her private information to follow the behavior of the crowd. A large theoretical literature has identified abstract mechanisms through which herding can arise, even in a world where people are fully rational. Until now, however, the empirical work on herding has been completely disconnected from this theoretical analysis; it simply looked for statistical evidence of trade clustering and, when that evidence was present, interpreted the clustering as herd behavior. However, since decision clustering may be the result of something other than herding—such as the common reaction to public announcements—the existing empirical literature cannot distinguish "spurious" herding from "true" herd behavior. 

In this post, we describe a novel approach to measuring herding in financial markets, which we employed in a recently published paper. We develop a theoretical model of herd behavior that, in contrast to the existing theoretical literature, can be brought to the data, and we show how to estimate it using financial markets transaction data. The estimation strategy allows us to distinguish "real" herding from "spurious herding," or the simple clustering of trading behavior. Our approach allows researchers to gauge the importance of herding in a financial market and to assess the inefficiency in the process of price discovery that herding causes.

Link Here.





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2 Comments so far

  1. Andre Wallin on March 12, 2015 11:17 am

    “Spend some of your time every day in hunting your weaknesses caught from commerce with the herd, as methodically, solemnly and vindictively as a monkey his fleas. You will find yourself swarming with them while you are surrounded by humanity. But you must not bring them up on the mountain… Do not play with political notions, aristocratisms or the reverse, for that is a compromise with the herd. Do not allow yourself to imagine a fine herd though still a herd. There is no fine herd. The cattle that call themselves ‘gentlemen’ you will observe to be a little cleaner. It is merely cunning and produced by a product called soap…” Windham Lewis

  2. daniel watkins on March 14, 2015 4:06 am

    A Real Time Test: Herding and Speculation

    This is one of my favorite pictures; it is relevant right now, too! Awareness of “herding” is very important to trading. Here is a test:

    A flash flood has been predicted for 3/18/15.

    Over the last few weeks - and especially over the last few days - we have seen the herd bunching up on the riverbank. It sees clouds in the distance and hears thunder and sees lightening. It wonders if a flash flood is coming just as it crosses the river and heads for the lush grasses of the Masai Mara.

    That flash floor prediction is all about the anxiety over whether “patient” will be removed from the FOMC statement. Believe me, please: Folks who listen to market “weather” forecasts every day are taking this possibility seriously and believe it could wash them away and suddenly drown them.

    Why get into the river when there might be a flash flood? Why not wait on the banks? That is exactly what is happening now. The world money herd is bunching up. It is showing up in price (charts) and in sentiment studies.

    These dire forecasts are overblown, if true at all. The test will come starting as early as Monday.

    Next week the herd will start crossing as it must. Equity markets will rise. Other gnus will see it is safe; they will follow in a stampede. The rally will be impressive.

    All this I offer as a real time test of herding and its relevance to speculation.


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