Sentiment and Beta Herding
Sungkyunkwan University - Department of Economics
University of Cambridge - Faculty of Economics and Politics
March 18, 2009
We propose a new non-parametric measure of herding, beta herding, by incorporating the interaction between sentiment and herding in standard linear factor models. Contrary to common belief that herding is significant when the market is under stress, we demonstrate that beta herding arises when investors are confident regarding the outlook for the market, whether it is rising or falling, rather than when the market is in crisis. In fact our study suggests that crises appear to lead investors to seek a the fundamenal risk-return relationship rather than herd. Our empirical results for the US equity market show that beta herding activity increases with market-wide sentiment. We also find that high beta stocks are priced following adverse herding when high (low) betas are biased higher (lower), although as in Fama and French (1992) beta does not unconditionally explain cross-sectional asset returns.
Number of Pages in PDF File: 61
Keywords: Herding, Sentiment, Market Crises, Cross-sectional Asset Returns
JEL Classification: C12, C31, G12, G14
Date posted: February 11, 2002 ; Last revised: March 22, 2009
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