Market Stress and Herding

Mark Salmon and Soosung Hwang ()

No 4340, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose a new approach to detecting and measuring herding which is based on the cross-sectional dispersion of the factor sensitivity of assets within a given market. This method enables us to evaluate if there is herding towards particular sectors or styles in the market including the market index itself and critically we can also separate such herding from common movements in asset returns induced by movements in fundamentals. We apply the approach to an analysis of herding in the US and South Korean stock markets and find that herding towards the market shows significant movements and persistence independently from and given market conditions and macro factors. We find evidence of herding towards the market portfolio in both bull and bear markets. Contrary to common belief, the Asian Crisis and in particular the Russian Crisis reduced herding and are clearly identified as turning points in herding behaviour.

Keywords: Herding; Heterogenous beliefs; Cross-sectional volatility (search for similar items in EconPapers)
JEL-codes: C12 C31 G12 G14 (search for similar items in EconPapers)
Date: 2004-04
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (265)

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