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Transmission of Information and Herd Behavior: an Application to Financial Markets

Victor M. Eguiluz·Martin G. Zimmermann
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Abstract

We propose a model for stochastic formation of opinion clusters, modelled by an evolving network, and herd behaviour to account for the observed fat-tail distribution in returns of financial-price data. The only parameter of the model is h, the rate of information dispersion per trade, which is a measure of herding behavior. For h below a critical h* the system displays a power-law distribution of the returns with exponential cut-off. However for h>h* an increase in the probability of large returns is found, and may be associated to the occurrence of large crashes.

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Victor M. Eguiluz, Martin G. Zimmermann. 2000-10-24. Transmission of Information and Herd Behavior: an Application to Financial Markets. https://doi.org/10.1103/physrevlett.85.5659

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