NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

Kenneth A. Froot, David S. Scharfstein, Jeremy C. Stein

NBER Working Paper No. 3250*
Issued in February 1990
NBER Program(s):   ITI    ME    IFM

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. These equilibria are

informationally inefficient.

*Published: Journal of Finance, Vol. 47, pp. 1461-84 September 1992

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