The Case for Herding is Stronger than You Think

22 Pages Posted: 21 Jan 2015 Last revised: 18 Feb 2015

See all articles by Martin T. Bohl

Martin T. Bohl

University of Muenster

Nicole Branger

University of Muenster - Finance Center Muenster

Mark M. Trede

University of Muenster - Faculty of Economics

Date Written: February 5, 2015

Abstract

In this paper, we challenge the often implemented herding measure by Chang, Cheng and Khorana (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. An empirical examination for the S&P 500 confirms the misleading implications of Chang, Cheng and Khorana's measure, while our modified test provides clear-cut evidence for herding behaviour.

Keywords: Measuring Herding Behaviour, Cross-Sectional Deviation of Stock Returns, US Stock Market

JEL Classification: G12

Suggested Citation

Bohl, Martin T. and Branger, Nicole and Trede, Mark M., The Case for Herding is Stronger than You Think (February 5, 2015). Available at SSRN: https://ssrn.com/abstract=2551857 or http://dx.doi.org/10.2139/ssrn.2551857

Martin T. Bohl

University of Muenster ( email )

Schlossplatz 2
D-48149 Muenster, D-48149
Germany

Nicole Branger (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Mark M. Trede

University of Muenster - Faculty of Economics ( email )

Universit├Ątsstr. 14-16
48143 Munster
Germany

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