Do Investors Follow the Herd in Option Markets?

44 Pages Posted: 27 Feb 2019

See all articles by Alejandro Bernales

Alejandro Bernales

Universidad de Chile

Thanos Verousis

Essex Business School

Nikolaos Voukelatos

University of Kent

Date Written: June 15, 2015

Abstract

We investigate the previously unexplored herding behaviour of investors in option markets, by examining equity option contracts traded in the US between 1996 and 2012. We document strong herding effects in option trading activity that are conditional on a set of systematic factors related to periods of market stress. More specifically, we find that option investors tend to herd during periods of high market volatility risk, on dates of macroeconomic announcements, during the financial crisis of 2008, when a large number of market option positions is either opened or closed, and during periods of a large average dispersion of analysts’ forecasts.

Keywords: Herding, Cross-Sectional Dispersion, Options

JEL Classification: G14, G11

Suggested Citation

Bernales, Alejandro and Verousis, Thanos and Voukelatos, Nikolaos, Do Investors Follow the Herd in Option Markets? (June 15, 2015). Available at SSRN: https://ssrn.com/abstract=3336268 or http://dx.doi.org/10.2139/ssrn.3336268

Alejandro Bernales (Contact Author)

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

Thanos Verousis

Essex Business School ( email )

United Kingdom

Nikolaos Voukelatos

University of Kent ( email )

Canterbury, Kent CT2 7PE
United Kingdom
0044 (0) 1227827705 (Phone)

HOME PAGE: http://https://www.kent.ac.uk/kbs/profiles/staff/voukelatos_nikolaos.html

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