Herd behaviour as a source of volatility in agent expectations

Bowden, M. and McDonald, S. (2006). Herd behaviour as a source of volatility in agent expectations. In: M. Costantino and C. A. Brebbia, Computational Finance and its Applications 2: WIT transactions on modelling and simulation. Computational Finance 2006, London, (129-140). June 2006.


Author Bowden, M.
McDonald, S.
Title of paper Herd behaviour as a source of volatility in agent expectations
Conference name Computational Finance 2006
Conference location London
Conference dates June 2006
Proceedings title Computational Finance and its Applications 2: WIT transactions on modelling and simulation   Check publisher's open access policy
Place of Publication London, UK
Publisher WIT Press
Publication Year 2006
Sub-type Fully published paper
ISBN 1-84564-174-4
ISSN 1743-355X
Editor M. Costantino
C. A. Brebbia
Volume 43
Start page 129
End page 140
Total pages 12
Language eng
Abstract/Summary Herd Behaviour is often cited as one of the forces behind excess volatility of stock prices as well as speculative bubbles and crashes in financial markets. This paper examines if social interaction and herd behaviour, modelled within a multi-agent framework, can explain these characteristics. The core of the model is based on the social learning literature which takes place in a small world network. We find that when the network consists entirely of herd agents then expectations become locked in an information cascade. Herd agents receive a signal, compare it with those agents with whom they are connected, and then adopt the majority position. Adding one expert agent enables the population to break the cascade as information filters from that agent to all other agents through contagion. We also find that moving from an ordered to a small world network dramatically increases the level of volatility in agent expectations and it quickly reaches a higher level (at which point increasing the randomness of the network has little effect). Increasing the influence of the experts, by increasing the number of connections from these agents, also increases volatility in the aggregate level of expectations. Finally it is found that under certain network structures herd behaviour will lead to information cascades and potentially to the formation of speculative bubbles.
Subjects 140104 Microeconomic Theory
140207 Financial Economics
Q-Index Code E1

 
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Created: Sat, 18 Apr 2009, 01:14:25 EST by Ms Sarada Rao on behalf of School of Economics