Herding for Profits: Market Breadth and the Cross-Section of Global Equity Returns

45 Pages Posted: 29 Aug 2019

See all articles by Adam Zaremba

Adam Zaremba

Poznań University of Economics and Business; Montpellier Business School

Adam Szyszka

Warsaw School of Economics

Andreas Karathanasopoulos

University of Dubai

Mateusz Mikutowski

Poznan University of Economics and Business

Date Written: August 29, 2019

Abstract

This paper shows that market breadth, i.e. the difference between the average number of rising stocks and the average number of falling stocks within a portfolio, is a robust predictor of future stock returns on market and industry portfolios for 64 countries for the period between 1973 and 2018. We link the market breadth with herd behavior and show that high market breadth portfolios significantly outperform low market breadth portfolios, and that this effect is robust to effects such as size, style, volatility, skewness, momentum, and trend-following signals. In addition, the role of market breadth is particularly strong among markets characterized by high limits to arbitrage, following bullish periods, and in collectivistic societies, supporting behavioral explanations of the phenomenon. We also examine practical implications of the effect and our results indicate that the effect may be employed for equity allocation and market timing, although frequent portfolio rebalancing can lead to higher transaction costs that may affect profitability.

Keywords: Herding, Market Breadth, Return Predictability, Asset Pricing, Portfolio Allocation

JEL Classification: G11, G12, G14, G15, G41

Suggested Citation

Zaremba, Adam and Szyszka, Adam and Karathanasopoulos, Andreas and Mikutowski, Mateusz, Herding for Profits: Market Breadth and the Cross-Section of Global Equity Returns (August 29, 2019). Available at SSRN: https://ssrn.com/abstract=3444882 or http://dx.doi.org/10.2139/ssrn.3444882

Adam Zaremba (Contact Author)

Poznań University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

Adam Szyszka

Warsaw School of Economics ( email )

Al. Niepodległości 164
Warszawa, 02-554
Poland

HOME PAGE: http://https://biogram.sgh.waw.pl/#/biogram/aszysz1

Andreas Karathanasopoulos

University of Dubai ( email )

AL MAKTOOM STREET
Dubai, 14143
United Arab Emirates

Mateusz Mikutowski

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, Poznań 61-875
Poland

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