Pricing of Herding

Abstract

We measure herding of trading activities by regressing individual order imbalances on market wide, industry wide, and dealer wide order imbalances. We find that stocks whose trading activities herd more have higher sensitivity of their returns to order imbalances. Investors demand compensations for herding. A 1% increase in the degree of herding this year predicts 8% increase in stock returns next year, after controlling for standard asset pricing factors and some of liquidity measures.

Keywords: Order Imbalance, Commonality, Herding

JEL Classification: G10, G12, G14