The Disagreement with Herding, Market Bubble, and Excess Volatility

Abstract

We construct a general equilibrium “disagreement with herding” model to identify the joint effect of the disagreement and herding among investors on the price bubble and excess return volatility. There are two classes of analysts one of which can capture the information in the public signal. An another analyst, on the other hand, do not have an enough ability to refine the public signal to exploit the information and therefore herd. i.e. tend to revise his opinion by moving toward the other’s opinion. As a consequence of the combinational dynamics of the disagreement and herding, the price bubble and the excess volatility is exaggerated especially when they are both huge.