Herding, from James Sogi

November 27, 2008 |

 Marketeers have been herding or stampeding recently. The NYSE up volume/down volume has been over 10:1 and over 1 million on one side. The days have been "trendy." Fish school and gazelles stampede for safety when under attack. Predators have to stand back or just pick off strays. Seems to be an effective survival type tactic. A question might be: when does the stampede start, and what triggers it?

Vinh Tu writes:

Virtual birds form flocks, when each bird individually follows three rules:

1. Separation: steer to avoid crowding local flockmates.

Alignment: steer towards the average heading of local flockmates.

Cohesion: steer to move toward the average position of local flockmates.

Here's a nice demo.

I'm looking for other good demos, for other types of herding behaviour.

Similarly, traders can stampede and trend as each individually decides that there is a trend going on. An exogenous shock that triggers a buy signal for enough traders would be able to trigger the stampede.

Adi Schnytzer writes:

In Australian and other bookmaker horse betting markets, herding is triggered by inside trades (plunges) and takes the odds lower than they the horse's true winning probability. This creates arbitrage opportunities. I have not yet gotten round to tote-only markets like the US or HK, but know that things there are more complicated by the absence of tradable updating prices. In the stock market, I'm sure it's also insiders or big money that triggers the herding and I hope to get around to this next year. Meanwhile, see A. Schnytzer and A. Snir, "Herding in Imperfect Markets with Inside Traders", Journal of Gambling Business and Economics, Volume 2, No. 2, 2008, 1-16. (available upon email request).


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