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Firm specific and macro herding by professional and amateur investors and their effects on market volatility

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  • Itzhak Venezia
  • Amrut Nashikkar
  • Zur Shapira
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    Abstract

    We find a herding tendency among both amateur and professional investors and conclude that the propensity to herd is lower in the professionals. These results are obtained both when we consider herding into individual stocks and herding into stocks in general. Herding depends on the firm’s systematic risk and size, and the professionals are less sensitive to these variables. The differences between the amateurs and the professionals may be attributable to the latter’s superior financial training. Most of the results are consistent with the theory that herding is information-based. We also find that the herding behavior of the two groups is a persistent phenomenon, and that it is positively and significantly correlated with stock market returns’ volatility. Finally, herding, mainly by amateurs, causes market volatility in the Granger causality sense.

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    Bibliographic Info

    Paper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp586.

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    Length: 11 pages
    Date of creation: Aug 2011
    Date of revision:
    Publication status: Published in Journal of Banking & Finance 35 (2011) 1599–1609
    Handle: RePEc:huj:dispap:dp586

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    16. Shapira, Zur & Venezia, Itzhak, 2001. "Patterns of behavior of professionally managed and independent investors," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1573-1587, August.
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    18. 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.
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    Cited by:
    1. Douglas Foster, F. & Gallagher, David R. & Looi, Adrian, 2011. "Institutional trading and share returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3383-3399.
    2. Chou, Robin K. & Wang, Yun-Yi, 2011. "A test of the different implications of the overconfidence and disposition hypotheses," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2037-2046, August.
    3. Peterson, David R. & Smedema, Adam R., 2011. "The return impact of realized and expected idiosyncratic volatility," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2547-2558, October.

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