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Herd behaviors in index futures trading: Driving factors and impact on market volatility

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  • Ming‐Hung Wu
  • Wan‐Ting Hu
  • Pei‐Shih Weng

Abstract

This study analyzes market index futures data on the Taiwan Futures Exchange to explore herd trading behaviors and their impact on the market. The study finds that herd behaviors are prevalent in all trading directions and that investor sentiment is a more direct explanation than information chasing. Herding in intraday trading increases market volatility on the same day but decreases it on the following day. Additional tests show that overnight trading has a weaker herding tendency and a less noticeable market correction on the following day, which can be attributed in part to the lower participation of retail traders in overnight sessions. The analysis using overnight trading reinforces the relevance of retail trading in explaining herd trading. Overall, the study offers new evidence and insights into herd behaviors in the derivatives market dominated by retail investors.

Suggested Citation

  • Ming‐Hung Wu & Wan‐Ting Hu & Pei‐Shih Weng, 2023. "Herd behaviors in index futures trading: Driving factors and impact on market volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(10), pages 1373-1392, October.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:10:p:1373-1392
    DOI: 10.1002/fut.22413
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