Behavioural Biases in Financial Markets : the Elusives Case of Hearding.

Summary Following the identification of certain cognitive aspects in economic decision making, several collective behaviors in economics and finance have been identified. Mimicry in the stock market is one of these manifestations, defined as the tendency of economic agents to follow their peers, sometimes ignoring information available to them. By examining the literature, this thesis identifies an inconsistency between the theoretical conception of mimicry and its empirical identification. Empirical models are divided into two categories: those focusing on investors (flows) and those examining returns. Existing empirical models for mimicry on returns do not consider mimicry at the micro level and some important factors, such as price variability, that affect the robustness of the methodology for identifying mimicry at the macro level, based on cross-sectional dispersion measures of returns. Using a combination of stock trading and stock returns data, this thesis first examines the inconsistency of the empirical results on micro-level mimicry with those on consensus returns. It is shown that micro-level mimicry, its direction (selling or buying) and the composition of the market (types of investors) affect the transmission mechanism from mimicry to consensus returns. Furthermore, a methodological examination of cross-sectional dispersion measures of stock returns reveals the weakness of existing empirical results due to the existence of a relationship between realized volatility and these same dispersion measures.