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Herd behavior of the overall market: Evidence based on the cross-sectional comovement of returns

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  • Lee, Kyuseok

Abstract

Employing the cross-sectional dispersion of returns as a measure detecting the herd behavior of the overall market, previous studies have reported mixed evidence of herding during periods of large price movements in the US stock markets. We reexamine the herd behavior of the overall market by employing a new measure of herding based on the cross-sectional comovement of returns in excess of its expected value under an assumed asset pricing model. Employing the proposed measure based on either the capital asset pricing model or the Fama-French three factor model during the period 7/1963–12/2014, we find strong evidence of herding during periods of mid to large negative price movements, but weak or no evidence of herding during periods of positive price movements. The recent US subprime crisis period is an exception because during the period no significant evidence of herding is found. We also find evidence that properly accounting for the effects of an assumed asset pricing model when calculating the herding measure is important and that the herding behavior of the overall market is likely to be driven by the contemporaneous market-wide information.

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  • Lee, Kyuseok, 2017. "Herd behavior of the overall market: Evidence based on the cross-sectional comovement of returns," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 266-284.
    • Handle: RePEc:eee:ecofin:v:42:y:2017:i:c:p:266-284
    DOI: 10.1016/j.najef.2017.07.006
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    More about this item

    Keywords

    Herd behavior; Stock market; Return dispersion; Return comovement;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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