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Effect of Market-Wide Herding on the Next Day's Stock Return

Author

Listed:
  • Andrey Kudryavtsev

    (Economics and Management Department, The Max Stern Yezreel Valley Academic College, Emek Yezreel 19300, Israel)

Abstract

The study analyzes daily cross-sectional market-wide herd behavior as a potential factor that may help in predicting next day's stock returns. Assuming that herding may lead to stock price overreaction and result in subsequent price reversals, I suggest that for a given stock, daily returns should be higher (lower) following trading days characterized by negative (positive) stock's returns and high levels of herd behavior. Analyzing daily price data for all the constituents of S&P 500 Index over the period from 1993 to 2019, and using two alternative market-wide herding measures, I document that following trading days characterized by high levels of herding, stock returns tend to exhibit significant reversals, while following trading days characterized by low levels of herding, stock returns tend to exhibit significant drifts.This effect is found to be more pronounced for smaller and more volatile stocks. Based on the study's findings, I formulate a trading strategy and demonstrate that it yields significantly positive returns.

Suggested Citation

  • Andrey Kudryavtsev, 2021. "Effect of Market-Wide Herding on the Next Day's Stock Return," Bulgarian Economic Papers bep-2021-04, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Mar 2021.
    • Handle: RePEc:sko:wpaper:bep-2021-04
    as

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    File URL: https://www.uni-sofia.bg/index.php/eng/content/download/248533/1639491/file/BEP-2021-04.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Behavioral Finance; herd behavior; herding; stock price drifts; stock price reversals; trading strategy.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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