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The Case of Herding ist Stronger than You Think

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  • Martin T. Bohl
  • Nicole Branger
  • Mark Trede

Abstract

In case of herding, investors follow each other, prices move together more than they normally do, and the cross-sectional dispersion of returns decreases. Chang, Cheng, and Khorana (2000) suggest to test for herding by regressing the cross-sectional absolute deviation on the absolute and squared excess market return. They argue that there is evidence for herding in case of large market movements when the coeffcient of the squared excess market return is signifcantly smaller than zero. We show that the true coeffcient of the squared excess market return is positive under the null hypothesis of no herding. The test of Chang, Cheng and Khorana is thus biased against finding evidence for herding. We find that this bias matters. For the S&P 500, the test of Chang, Cheng and Khorana signals that there is no herding over the period from 2008 to 2013, while the modified test based on the correct null hypothesis provides clear evidence for herding.

Suggested Citation

  • Martin T. Bohl & Nicole Branger & Mark Trede, 2015. "The Case of Herding ist Stronger than You Think," CQE Working Papers 3715, Center for Quantitative Economics (CQE), University of Muenster.
    • Handle: RePEc:cqe:wpaper:3715
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    File URL: https://www.wiwi.uni-muenster.de/cqe/sites/cqe/files/CQE_Paper/CQE_WP_37_2015.pdf
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    References listed on IDEAS

    as
    1. Chang, Eric C. & Cheng, Joseph W. & Khorana, Ajay, 2000. "An examination of herd behavior in equity markets: An international perspective," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1651-1679, October.
    2. Thomas Chiang & Lin Tan & Jiandong Li & Edward Nelling, 2013. "Dynamic Herding Behavior in Pacific-Basin Markets: Evidence and Implications," Multinational Finance Journal, Multinational Finance Journal, vol. 17(3-4), pages 165-200, September.
    3. Goodfellow, Christiane & Bohl, Martin T. & Gebka, Bartosz, 2009. "Together we invest? Individual and institutional investors' trading behaviour in Poland," International Review of Financial Analysis, Elsevier, vol. 18(4), pages 212-221, September.
    4. Chiang, Thomas C. & Zheng, Dazhi, 2010. "An empirical analysis of herd behavior in global stock markets," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1911-1921, August.
    5. John R. Nofsinger & Richard W. Sias, 1999. "Herding and Feedback Trading by Institutional and Individual Investors," Journal of Finance, American Finance Association, vol. 54(6), pages 2263-2295, December.
    6. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    7. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. "Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-1698, December.
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    Cited by:

    1. Vijay Kumar Shrotryia & Himanshi Kalra, 2021. "Analysis of Sectoral Herding through Quantile Regression: A Study of S&P BSE 500 Stocks," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(1), pages 1-16, June.

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    More about this item

    Keywords

    herding; cross-sectional deviation;

    JEL classification:

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

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