Extreme Returns and Herding of Trade Imbalances
Y Peter Chung and
S Thomas Kim
Review of Finance, 2017, vol. 21, issue 6, 2379-2399
We estimate the stock’s likelihood of extreme returns by measuring the extent to which the stock’s trades are correlated with market-wide and industry-wide trades during normal times, referred to as herding. We find that stocks whose trades herd most with aggregate-level trades experience most negative (positive) returns during market crashes (booms). While herding generates extreme returns in both sides, investors appear to demand compensation for the possibility of extreme low returns. This is the case even when we control for standard asset pricing variables and other tail risk proxies.
Keywords: Herding of trades; Tail risk; Predicting crashes (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
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