Effect of Response to Stock Price Changes on the Persistence of Reputation-Based Herding

The existence and extent of herding behavior in the financial market is an important topic to analyze, since herding impedes efficiency in the operation of the financial system, and more importantly, increases the risk of financial crisis. This paper discusses one type of herding behavior, namely reputation-based herding. Based on the model developed by previous researchers who focused on asset market in which price is fixed, I adapted the model to simulate the behavior of fund managers in stock market to capture the impact of price responses on the persistence of herding. This paper takes a purely theoretical approach. By building a model in Python to track the behavior of investors, I found that the increase in stock price followed by the bids of previous investors dampens herding behavior, although the extent of this dampening impact depends on several features of the stock market in consideration.