A model for the contagion and herding

This work concerns the modeling of contagion and herding effects which can cause significant movements of prices and volatilities. The idea is to adapt some concepts borrowed from the Biological Sciences and that have emerged as useful analogies to model a variety of phenomena in a large variety of fields such as Engineering and Economics. In this work, the allegory of interacting particles is used to describe the contagion and emergence of herding behavior of financial agents leading to the formation of clusters. The main idea is to adapt the schemes originally employed in particle swarm optimization algorithms, together with the concepts of leaders and followers. As an illustration of the applicability of the proposed model, a case study is presented using data from the World Bank.