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The case for herding is stronger than you think

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  • Bohl, Martin T.
  • Branger, Nicole
  • Trede, Mark

Abstract

In this paper, we challenge the often implemented herding measure by Chang et al. (2000). They regress the cross-sectional absolute deviation of returns on the absolute and squared excess market return. A coefficient on the squared excess market return significantly smaller than zero is interpreted as evidence for herding. However, we show that the true coefficient is positive under the null hypothesis of no herding. Hence, their test is biased against finding evidence in favour of herding. Empirical examinations for the S&P 500 and the EuroStoxx 50 confirm the misleading implications of Chang, Cheng and Khorana’s measure, while our modified test provides clear-cut evidence for herding behaviour.

Suggested Citation

  • Bohl, Martin T. & Branger, Nicole & Trede, Mark, 2017. "The case for herding is stronger than you think," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 30-40.
    • Handle: RePEc:eee:jbfina:v:85:y:2017:i:c:p:30-40
    DOI: 10.1016/j.jbankfin.2017.08.006
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    4. Park, Beum-Jo & Kim, Myung-Joong, 2017. "A Dynamic Measure of Intentional Herd Behavior in Financial Markets," MPRA Paper 82025, University Library of Munich, Germany.
    5. Lord Mensah & Charles Andoh & Saint Kuttu & Eric Boachie-Yiadom, 2023. "The level of African forex markets integration and Eurobond issue," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(1), pages 232-250, March.
    6. Kočenda, Evžen & Moravcová, Michala, 2019. "Exchange rate comovements, hedging and volatility spillovers on new EU forex markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 58(C), pages 42-64.
    7. Filip, Angela Maria & Pochea, Maria Miruna, 2023. "Intentional and spurious herding behavior: A sentiment driven analysis," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    8. Demirer, Rıza & Leggio, Karyl B. & Lien, Donald, 2019. "Herding and flash events: Evidence from the 2010 Flash Crash," Finance Research Letters, Elsevier, vol. 31(C).
    9. Santi, Caterina & Zwinkels, Remco C.J., 2023. "Exploring style herding by mutual funds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    10. Zhang, Yaojie & He, Mengxi & Wen, Danyan & Wang, Yudong, 2023. "Forecasting crude oil price returns: Can nonlinearity help?," Energy, Elsevier, vol. 262(PB).
    11. S S S Kumar, 2022. "Institutional Herding: Causality and Persistence," IIM Kozhikode Society & Management Review, , vol. 11(2), pages 183-194, July.
    12. Junkai Wang & Robert Hudson, 2024. "Better ways to test for herding," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 790-818, January.
    13. Puput Tri Komalasari & Marwan Asri & Bernardinus M. Purwanto & Bowo Setiyono, 2022. "Herding behaviour in the capital market: What do we know and what is next?," Management Review Quarterly, Springer, vol. 72(3), pages 745-787, September.
    14. Ali, Sara & Badshah, Ihsan & Demirer, Riza, 2023. "Anti-herding by hedge funds and its implications for expected returns," Journal of Economic Behavior & Organization, Elsevier, vol. 211(C), pages 31-48.
    15. Stavroyiannis, Stavros & Babalos, Vassilios & Bekiros, Stelios & Lahmiri, Salim, 2019. "Is anti-herding behavior spurious?," Finance Research Letters, Elsevier, vol. 29(C), pages 379-383.
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    More about this item

    Keywords

    Measuring herding behaviour; Cross-Sectional deviation of stock returns; US stock market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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