Asymmetric herding as a source of asymmetric return volatility

As a considerable source of asymmetry in return volatility, this paper introduces asymmetric herding and extends the continuous beliefs system to account for its asymmetry and derive the asymmetric herding parameters that are easily estimated by using a maximum likelihood method based on the GARCH-type econometric model. This paper presents new empirical evidence for asymmetry in the exchange rates volatility of major currencies against the US dollar, which have bilateral nature. Interestingly, the asymmetry of Japanese yen is the opposite of that of others and the global financial crisis highlights the opposite asymmetry. Some of traditional hypotheses, such as the leverage effect and the volatility feedback effect, do not adequately explain these findings; however, a significant asymmetric herding effect is observed and appears to be time-varying. Further, the clear link between asymmetric herding and volatility strongly supports the hypothesis of the asymmetric herding effect.