A Note on Risk Aversion and Herd Behavior in Financial Markets

J. Decamps, S. LOVO

Geneva Papers on Risk and Insurance Theory

July 2006, vol. 31, n°1

Departments: Finance, GREGHEC (CNRS)

We show that differences in market participants risk aversion can generate herd behavior in stock markets where assets are traded sequentially. This in turn prevents learning of market's fundamentals. These results are obtained without introducing multidimensional uncertainty or transaction cost