Are investors and traders cats, rationally and independently sniffing out returns? Or are they cows, flowing with a herd that must know something? These blog entries relate to behavioral finance, the study of the animal spirits of investing and trading.
December 20, 2004 - Animal Spirits
In their October 2003 paper entitled “Determinants of Stock Market Volatility and Risk Premia”, Mordecai Kurz, Hehui Jin and Maurizio Motolese model and examine “the dynamics of diverse [but still rational] beliefs” as the driver of asset market volatility. Specifically, they postulate that: Keep Reading
October 30, 2004 - Animal Spirits
In their April 2003 paper entitled “Systematic Noise”, Brad Barber, Terrance Odean and Ning Zhu investigate the degree to which the trading behaviors of individual investors are systematic and herd-like. Using samples of 66,465 investors at a large national discount broker and 665,533 investors at a large retail broker, they find that: Keep Reading
October 9, 2004 - Animal Spirits
Investor herding is convergence of behavior based only on observation of what others are doing (such as buying or selling). Examples in the stock market are trend-following, “don’t fight the tape” and momentum investing. Herding is distinct from investors acting at the same time but independently in response to news related to investment fundamentals (such as the latest jobs report from the Bureau of Labor Statistics or a company earnings release). In their December 2001 paper entitled Herd Behavior and Cascading in Capital Markets: A Review and Synthesis, David Hirshleifer and Siew Hong Teoh provide an overview of financial herding. Keep Reading