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What determines the dynamics of absolute excess returns on stock markets?

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  • Kurz, Claudia
  • Kurz-Kim, Jeong-Ryeol
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    Abstract

    In this paper, we quantify the dynamics of absolute excess returns on stock markets depending on three factors: the average of the absolute excess return, the level of the stock price, and stock market volatility. We also argue that the absolute excess return can be regarded as an empirical measure of the herding behavior of financial investors. Our empirical results for the German stock index show that the absolute excess return depends significantly on all three factors, although volatility may be seen as the strongest factor among them.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 118 (2013)
    Issue (Month): 2 ()
    Pages: 342-346

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    Handle: RePEc:eee:ecolet:v:118:y:2013:i:2:p:342-346

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    Web page: http://www.elsevier.com/locate/ecolet

    Related research

    Keywords: Absolute excess returns; Uncertainty; Herding behavior; Mean reverting; Stock market volatility;

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    References

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    1. Bogaçhan Çelen & Shachar Kariv, 2004. "Distinguishing Informational Cascades from Herd Behavior in the Laboratory," American Economic Review, American Economic Association, vol. 94(3), pages 484-498, June.
    2. Andreas Park & Hamid Sabourian, 2011. "Herding and Contrarian Behavior in Financial Markets," Econometrica, Econometric Society, vol. 79(4), pages 973-1026, 07.
    3. Andrea Morone, 2008. "Financial markets in the laboratory: an experimental analysis of some stylized facts," Quantitative Finance, Taylor & Francis Journals, vol. 8(5), pages 513-532.
    4. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
    5. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
    6. Hott, Christian, 2009. "Herding behavior in asset markets," Journal of Financial Stability, Elsevier, vol. 5(1), pages 35-56, January.
    7. Cont, Rama & Bouchaud, Jean-Philipe, 2000. "Herd Behavior And Aggregate Fluctuations In Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 170-196, June.
    8. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    9. Itzhak Venezia & Amrut Nashikkar & Zur Shapira, 2011. "Firm specific and macro herding by professional and amateur investors and their effects on market volatility," Discussion Paper Series dp586, The Center for the Study of Rationality, Hebrew University, Jerusalem.
    10. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
    11. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
    12. Jeong-Ryeol Kurz-Kim, 2009. "Further evidence for the negative relationship between stock returns and volatility," Applied Economics Letters, Taylor & Francis Journals, vol. 16(13), pages 1295-1300.
    13. Lee, In Ho, 1998. "Market Crashes and Informational Avalanches," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 741-59, October.
    14. Morone, Andrea, 2012. "A simple model of herd behavior, a comment," Economics Letters, Elsevier, vol. 114(2), pages 208-211.
    15. Venezia, Itzhak & Nashikkar, Amrut & Shapira, Zur, 2011. "Firm specific and macro herding by professional and amateur investors and their effects on market volatility," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1599-1609, July.
    16. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
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