Herd behavior and aggregate fluctuations in financial markets

We present a simple model of a stock market where a random communication st ructure between agents generically gives rise to heavy tails in the distrib ution of stock price variations in the form of an exponentially truncated p ower law, similar to distributions observed in recent empirical studies of high-frequency market data. Our model provides a link between two well-know n market phenomena: the heavy tails observed in the distribution of stock m arket returns on one hand and herding behavior in financial markets on the other hand. In particular, our study suggests a relation between the excess kurtosis observed in asset returns, the market order how and the tendency of market participants to imitate each ether.