The case for herding is stronger than you think |
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| Affiliation: | 1. Department of Economics, University of Münster, Am Stadtgraben 9, 48143 Münster, Germany;2. Finance Center Münster, University of Münster, Universitätsstrasse 14-16, 48143 Münster, Germany;1. Centre of Planning and Economic Research and Hellenic Open University, 11, Amerikis str. 106 72 Athens, Greece;2. Kent Business School, University of Kent, Parkwood Road, Canterbury, Kent, CT2 7PE, UK;3. Durham University Business School, Mill Hill Lane, Durham DH1 3LB, UK;1. Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin, 10, Turkey;2. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;3. IPAG Business School, Paris, France;4. Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, United States;5. Department of Finance & Economics, College of Industrial Management, King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia;1. Guangdong Institute of Enterprise Development, Guangzhou 510620, China;2. Shidler College of Business, University of Hawaii, Honolulu, HI 96822, USA;3. School of Business, Renmin University of China, Beijing 100872, China |
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| Abstract: | In this paper, we challenge the often implemented herding measure by Chang et al. (2000). They regress the cross-sectional absolute deviation of returns on the absolute and squared excess market return. A coefficient on the squared excess market return significantly smaller than zero is interpreted as evidence for herding. However, we show that the true coefficient is positive under the null hypothesis of no herding. Hence, their test is biased against finding evidence in favour of herding. Empirical examinations for the S&P 500 and the EuroStoxx 50 confirm the misleading implications of Chang, Cheng and Khorana’s measure, while our modified test provides clear-cut evidence for herding behaviour. |
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