From Harvard University and NBER, Massachusetts Institute of Technology (MIT) and NBER, and MIT and NBER respectively. We thank Mike Fishman, Greg Mankiw, Stew Myers, Andre Perold, Julio Rotemberg, Andrei Shleifer, and seminar participants at numerous institutions for helpful comments. We are also grateful for research support from the Olin and Ford Foundations, MIT's International Financial Services Research Center, Batterymarch Financial Management, and the Division of Research at Harvard Business School.
Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation
Article first published online: 30 APR 2012
1992 The American Finance Association
The Journal of Finance
Volume 47, Issue 4, pages 1461–1484, September 1992
How to Cite
FROOT, K. A., SCHARFSTEIN, D. S. and STEIN, J. C. (1992), Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation. The Journal of Finance, 47: 1461–1484. doi: 10.1111/j.1540-6261.1992.tb04665.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.