Abstract for: The Internet as source of herding behavior: Exploring consequences in financial markets
By interconnecting traders’ strategies through the price of a risky asset, this paper constructs a causal structure that is the base of a system dynamics simulation model about an artificial financial market. At first, the market is free of herding behavior. However, the market becomes contaminated by the inflow of individual investors who trade with strategies designed by others. Individual investors imitate traders that get the best trading performances and the way to obtain it is from the Internet. By comparing the simulation results of the markets with and without herding, we investigate the impact of herding on the market liquidity and on the traders’ performances. Our findings show that although herding generates illiquidity and volatility, it is not a decisive factor to determine which traders perform better. However, the wealth of these traders could be harmed when the individual investors trade in the market.