What Causes Herding:Information Cascade or Search Cost ?
AbstractWe analyze in this study what could have caused herding in the stock market. Information cascades have often been considered as a major cause. However, we present in this study evidences inconsistent with that hypothesis. Our analysis is in support of an alternative theory based on search cost of investors. Specifically, previous works studied daily data or those with lower frequency based on a herding measure of Lakonishok, Shleifer, and Vishny (1992). We adopt instead the measure of Patterson and Sharma (2006) and argue that the search model of Vayanos and Wang (2007) characterize herding phenomenon better. Our analysis supports their hypothesis employing intraday order book data. We find that stronger order flow herding is driven by lower transactions cost. Herding tend to occur in trading of high-cap, high turnover stocks, which contradicts prediction of the information cascade hypothesis. Information cascade effect, if any, is actually stronger near market close than at open. Therefore our study suggests that herding could be related more to intrinsic search cost structure of investors rather than information related factors.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 20217.
Date of creation: 03 Feb 2009
Date of revision: 23 Jan 2010
Herding; information cascade; search model; order book;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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