Big players and herding in asset markets: The case of the Russian ruble

We present a theory of asset pricing in which discretionary actions of "Big Players" encourage herding and irrational bubbles, thus weakening the tendency of asset prices to equal their rationally expected present values. The theory implies that when Big Players influence a market, martingale models are inapplicable. We test the theory using qualitative and numerical data from an important episode in Russian monetary history. The use of Benoit Mandelbrot's R/S analysis, a statistical technique appropriate to the study of long-memory processes, supports our claims about herding and martingales. Our results weaken the case for present value models and strengthen the case for noise-trader models. Our theory and technique may be applied in many other historical cases as well as that presented here.