European Business Schools Librarian's Group

HEC Research Papers Series,
HEC Paris

No 758: Risk aversion and herd behavior in financial markets

Stefano LOVO and Jean-Paul DECAMPS
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Jean-Paul DECAMPS: GREMAQ-IDEI Universite de Toulouse

Abstract: We show that differences in investors risk aversion can generate herd behavior in stock markets where assets are traded sequentially. This in turn prevents markets from being efficient in the sense that financial market prices do not converge to the asset's fundamental value. The informational efficiency of the market depends on the distribution of the risky asset across risk averse agents. These results are obtained without introducing multidimensional uncertainty.

Keywords: herd behavior; stock markets; efficiency

JEL-codes: G14

36 pages, May 14, 2002

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