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Herd on the Street: Informational Inefficiencies in a Market with Short‐Term Speculation
Author(s) -
FROOT KENNETH A.,
SCHARFSTEIN DAVID S.,
STEIN JEREMY C.
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04665.x
Subject(s) - speculation , herding , asset (computer security) , financial economics , economics , herd behavior , term (time) , monetary economics , finance , computer science , physics , computer security , quantum mechanics , forestry , geography
Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals.