Firm specific and macro herding by professional and amateur investors and their effects on market volatility

Itzhak Venezia, Amrut Nashikkar and Zur Shapira

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: We find a herding tendency among both amateur and professional investors and conclude that the propensity to herd is lower in the professionals. These results are obtained both when we consider herding into individual stocks and herding into stocks in general. Herding depends on the firm’s systematic risk and size, and the professionals are less sensitive to these variables. The differences between the amateurs and the professionals may be attributable to the latter’s superior financial training. Most of the results are consistent with the theory that herding is information-based. We also find that the herding behavior of the two groups is a persistent phenomenon, and that it is positively and significantly correlated with stock market returns’ volatility. Finally, herding, mainly by amateurs, causes market volatility in the Granger causality sense.

Pages: 11 pages
Date: 2011-08
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (61)

Published in Journal of Banking & Finance 35 (2011) 1599–1609

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