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Herding and information based trading

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  • Zhou, Rhea Tingyu
  • Lai, Rose Neng
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    Abstract

    This paper expands on the existing literature on information asymmetry by testing if herding exists. We test herd behavior in a transparent and order-driven market using intraday data. We propose (1) a modification in the herding measure, (2) that investors tend to herd more based on fundamental analysis relative to technical analysis, and (3) that informational asymmetry can be identified by applying the informational cascade model to herding. In general, our analyses agree with the existing literature that herding tends to be more prevalent with small stocks and in economic downturns and that investors are more likely to herd when selling rather than buying stocks. Most importantly, our results reveal the existence of informational cascades, which highlights the crucial role played by so-called fashion leaders, especially when more informed investors trade with "noise".

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 16 (2009)
    Issue (Month): 3 (June)
    Pages: 388-393

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    Handle: RePEc:eee:empfin:v:16:y:2009:i:3:p:388-393

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

    Related research

    Keywords: Herding Information based trading Informational cascades;

    References

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    1. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
    2. 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.
    3. Svitlana Voronkova & Martin T. Bohl, 2005. "Institutional Traders' Behavior in an Emerging Stock Market: Empirical Evidence on Polish Pension Fund Investors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7-8), pages 1537-1560.
    4. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
    5. Brockman, Paul & Chung, Dennis Y, 2000. "Informed and Uninformed Trading in an Electronic, Order-Driven Environment," The Financial Review, Eastern Finance Association, vol. 35(2), pages 125-46, May.
    6. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-82, June.
    7. Hyuk Choe & Bong-Chan Kho & Rene M. Stulz, 1998. "Do Foreign Investors Destabilize Stock Markets? The Korean Experience in 1997," NBER Working Papers 6661, National Bureau of Economic Research, Inc.
    8. Hee-Joon Ahn, 2001. "Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong," Journal of Finance, American Finance Association, vol. 56(2), pages 767-788, 04.
    9. Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP -412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
    11. Glosten, Lawrence R. & Harris, Lawrence E., 1988. "Estimating the components of the bid/ask spread," Journal of Financial Economics, Elsevier, vol. 21(1), pages 123-142, May.
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    Citations

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    Cited by:
    1. Gavriilidis, Konstantinos & Kallinterakis, Vasileios & Ferreira, Mario Pedro Leite, 2013. "Institutional industry herding: Intentional or spurious?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 192-214.
    2. Boortz, Christopher K. & Jurkatis, Simon & Kremer, Stephanie & Nautz, Dieter, 2013. "The impact of information risk and market stress on institutional trading: New evidence through the lens of a simulated herd model," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79728, Verein für Socialpolitik / German Economic Association.
    3. Christopher Boortz & Simon Jurkatis & Stephanie Kremer & Dieter Nautz, 2013. "Herding in financial markets: Bridging the gap between theory and evidence," SFB 649 Discussion Papers SFB649DP2013-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Christopher Boortz & Stephanie Kremer & Simon Jurkatis & Dieter Nautz, 2014. "Information Risk, Market Stress and Institutional Herding in Financial Markets: New Evidence Through the Lens of a Simulated Model," SFB 649 Discussion Papers SFB649DP2014-029, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    5. Poon, Ser-Huang & Rockinger, Michael & Stathopoulos, Konstantinos, 2013. "Market liquidity and institutional trading during the 2007–8 financial crisis," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 86-97.
    6. April Knill & Kristina Minnick & Ali Nejadmalayeri, 2012. "Experience, information asymmetry, and rational forecast bias," Review of Quantitative Finance and Accounting, Springer, vol. 39(2), pages 241-272, August.
    7. Christopher Boortz & Simon Jurkatis & Stephanie Kremer & Dieter Nautz, 2013. "Institutional Herding in Financial Markets: New Evidence through the Lens of a Simulated Model," Discussion Papers of DIW Berlin 1336, DIW Berlin, German Institute for Economic Research.
    8. 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.
    9. Gębka, Bartosz & Wohar, Mark E., 2013. "International herding: Does it differ across sectors?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 55-84.
    10. Wang, Yudong & Liu, Li & Gu, Rongbao, 2009. "Analysis of efficiency for Shenzhen stock market based on multifractal detrended fluctuation analysis," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 271-276, December.
    11. Economou, Fotini & Kostakis, Alexandros & Philippas, Nikolaos, 2011. "Cross-country effects in herding behaviour: Evidence from four south European markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(3), pages 443-460, July.

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