Avery, ChristopherZemsky, Peter2019-09-291998Avery, Christopher, and Peter Zemsky. 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets." American Economic Review 88(4): 724-748.0002-82821944-7981http://nrs.harvard.edu/urn-3:HUL.InstRepos:41426687We study the relationship between asset prices and herd behavior, which occurs when traders follow the trend in past trades. When traders have private information on only a single dimension of uncertainty (the effect of a shock to the asset value), price adjustments prevent herd behavior. Herding arises when there are two dimensions of uncertainty (the existence and effect of a shock), but it need not distort prices because the market discounts the informativeness of trades during herding. With a third dimension of uncertainty (the quality of traders' information), herd behavior can lead to a significant, short-run mispricing.(JEL G12, G14, D83, D84).en-USJournal Article2019-09-29