High-Frequency Herding and Stock Prices

Abstract

This study investigates high-frequency herding behavior in TOPIX 100 index-listed stocks and its impact on stock prices over different time horizons around tick size reduction on the Tokyo Stock Exchange. Our results show that high-frequency herding exists, especially at very short time horizons, and that the level of herding behavior decreases after tick size reduction. We observe that high-frequency herding is asymmetric under different market conditions and is more pronounced during periods of down markets, low trading volume, and low volatility before the reduction, while herding asymmetry is weak after the reduction. Furthermore, we find that stocks traded by herds experience a significant contemporaneous price impact accompanied by subsequent price reversals before the modification, particularly under inactive market states, but are followed by price continuations after the change. In addition, following tick size reduction, herding diminishes over the trading day, implying that this behavior speeds up intraday price adjustment.

Keywords: High-frequency herding, Stock prices, Tick size reduction, Flash crashes, Tokyo Stock Exchange