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APS » Journals » Phys. Rev. Lett. » Volume 85 » Issue 26
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Phys. Rev. Lett. 85, 5659–5662 (2000)

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

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Víctor M. Eguíluz1,2,* and Martín G. Zimmermann1,3,†,‡
1Instituto Mediterráneo de Estudios Avanzados IMEDEA (CSIC-UIB), E-07071 Palma de Mallorca, Spain
2Center for Chaos and Turbulence Studies, The Niels Bohr Institute, Blegdamsvej 17, DK-2100 Copenhagen Ø, Denmark
3Departamento de Física, Facultad Ciencias Exactas y Naturales, Universidad de Buenos Aires, Buenos Aires, Argentina

Received 2 February 2000; revised 17 July 2000; published in the issue dated 25 December 2000

See accompanying Physics Focus

We propose a model for stochastic formation of opinion clusters, modeled by an evolving network, and herd behavior 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 cutoff. However, for h>h* an increase in the probability of large returns is found and may be associated with the occurrence of large crashes.

© 2000 The American Physical Society

URL:
http://link.aps.org/doi/10.1103/PhysRevLett.85.5659
DOI:
10.1103/PhysRevLett.85.5659
PACS:
87.23.Ge, 02.50.Le, 05.45.Tp, 05.65.+b

*Corresponding author.Email address: victor@imedea.uib.es

†URL: http://www.nld.df.uba.ar/

‡URL: http://www.imedea.uib.es/Nonlinear

 
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