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Sentiment and Beta Herding

Soosung Hwang

Sungkyunkwan University - Department of Economics

Mark Salmon

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

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Date posted: February 11, 2002 ; Last revised: March 22, 2009

Suggested Citation

Hwang, Soosung and Salmon, Mark, Sentiment and Beta Herding (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=299919 or http://dx.doi.org/10.2139/ssrn.299919

Contact Information

Soosung Hwang (Contact Author)
Sungkyunkwan University - Department of Economics ( email )
25-2 Sungkyunkwan-ro
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)
Mark Howard Salmon
University of Cambridge - Faculty of Economics and Politics ( email )
Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
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