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Herding and Power Laws in Financial Markets

Author

Listed:
  • Makoto Nirei

    (The University of Tokyo)

  • John Stachurski

    (Australian National University)

  • Koichiro Takaoka

    (Hitotsubashi University)

  • Tsutomu Watanabe

    (The University of Tokyo)

Abstract

This study provides an explanation of the emergence of power laws in trading volume and asset returns. In the model, traders infer other traders’ private signals regarding the value of an asset from their actions and adjust their own behavior accordingly. When the number of traders is large and the signals for asset value are noisy, this leads to power laws for equilibrium volume and returns. We also provide numerical results showing that the model reproduces observed distributions of daily stock volume and returns.

Suggested Citation

  • Makoto Nirei & John Stachurski & Koichiro Takaoka & Tsutomu Watanabe, 2018. "Herding and Power Laws in Financial Markets," CARF F-Series CARF-F-434, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf434
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