Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Minneapolis
Discussion Paper / Institute for Empirical Macroeconomics
Rational herd behavior and the globalization of securities markets
Guillermo A. Calvo
Enrique G. Mendoza
Abstract

This paper shows that globalization of securities markets exacerbates the volatility of capital flows by strengthening incentives for herding behavior. This is a prediction of a mean-variance portfolio optimization model with imperfect information, in which investors acquire country-specific expertise at a fixed cost and incur variable reputational costs. The model produces equilibria in which incentives to confirm rumors decrease with globalization. Simulations based on equity markets data and country credit ratings suggest that herd behavior can induce large capital outflows from emerging markets.


Download Full text
Download Full text
Cite this item
Guillermo A. Calvo & Enrique G. Mendoza, Rational herd behavior and the globalization of securities markets, Federal Reserve Bank of Minneapolis, Discussion Paper / Institute for Empirical Macroeconomics 120, 1997.
More from this series
JEL Classification:
Subject headings:
Keywords: Capital market ; Securities ; Stock market
For corrections, contact Janelle Ruswick ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal