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Extreme Returns and Herding of Trade Imbalances

Author

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  • Y Peter Chung
  • S Thomas Kim

Abstract

We estimate the stock’s likelihood of extreme returns by measuring the extent to which the stock’s trades are correlated with market-wide and industry-wide trades during normal times, referred to as herding. We find that stocks whose trades herd most with aggregate-level trades experience most negative (positive) returns during market crashes (booms). While herding generates extreme returns in both sides, investors appear to demand compensation for the possibility of extreme low returns. This is the case even when we control for standard asset pricing variables and other tail risk proxies.

Suggested Citation

  • Y Peter Chung & S Thomas Kim, 2017. "Extreme Returns and Herding of Trade Imbalances," Review of Finance, European Finance Association, vol. 21(6), pages 2379-2399.
    • Handle: RePEc:oup:revfin:v:21:y:2017:i:6:p:2379-2399.
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    File URL: http://hdl.handle.net/10.1093/rof/rfx004
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    Cited by:

    1. Chung, Y. Peter & Hong, Hyun A. & Kim, S. Thomas, 2019. "What causes the asymmetric correlation in stock returns?," Journal of Empirical Finance, Elsevier, vol. 54(C), pages 190-212.

    More about this item

    Keywords

    Herding of trades; Tail risk; Predicting crashes;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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