Herding for profits: Market breadth and the cross-section of global equity returns

Adam Zaremba (), Adam Szyszka, Andreas Karathanasopoulos and Mateusz Mikutowski

Economic Modelling, 2021, vol. 97, issue C, 348-364

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 (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 G41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:97:y:2021:i:c:p:348-364

DOI: 10.1016/j.econmod.2020.04.006

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