How to Measure Herd Behavior on the Credit Market?

Abstract

In this article we present a technique for estimating the effect of herd behavior in case of granting loans on the market for corporate lending. Given that expert opinion as well as bounded rationality plays a key role in the process of decision making on a credit application’s approval, overestimation of other players’ actions may have a potential for worsening the quality of corporate loans portfolio of a commercial bank. In order to mitigate such an effect it is proposed to use the developed indicators as an additional tool in evaluating a loan application. Also in the result of the carried out research we’ve revealed a cross-country pattern of herding effect’s development on the credit market: the better the quality of national market’s institutions the stronger is the coordination of credit market players in form of herd behavior. One of explanations of the revealed paatern may be linked with the competition issue on the credit market.

DOI: 10.5901/mjss.2014.v5n20p516