Institutional investors' mimicry in stock markets: theoretical and empirical aspects.

Summary After a review of the theoretical and empirical literature on the causes and observations of mimetic behavior by institutional investors, we focus on the threat it poses to financial stability. Our work then provides a new analysis of mimicry: that of a central bank. Based on a monograph from the ECB's perspective, we consider a monetary policy response to mimetic risk. Indeed, recent work and the experience of the financial crisis suggest that a preventive policy is now not only desirable but also more operational than in the past. We then analyze the mechanisms by which the two essential tools of modern monetary policy, policy rates and communication, could counter mimeticism and influence investor sentiment. Finally, after examining the ECB's communication on financial stability through its two main channels, we model a case of conflict of objectives between monetary stability and financial stability illustrating the limits of transparency for the central bank.