Does herding affect volatility? Implications for the Spanish stock market

Abstract

According to rational expectation models, uninformed or liquidity trading make market price volatility rise. This paper sets out to analyze the impact of herding, which may be interpreted as one of the components of uninformed trading, on the volatility of the Spanish stock market. Herding is examined at the intraday level, considered the most reliable sampling frequency for detecting this type of investor behavior, and measured using the Patterson and Sharma (2006) herding intensity measure. Different volatility measures (historical, realized and implied) are employed. The results confirm that herding has a direct linear impact on volatility for all of the volatility measures considered although the corresponding intensity is not always the same. In fact, herding variables seem to be useful in volatility forecasting and therefore in decision making when volatility is considered a key factor.

Investor herds and regime-switching: Evidence from Gulf Arab stock markets

“…The literature defines herding as an obvious intent by investors to ignore their personal beliefs (or information) and copy the behavior of other investors (Bikhchandani and Sharma, 2001), leading them to trade in the same direction and thus moving in and out of markets as a group (Nofsinger and Sias, 1999). Even though such behavior among investors can be driven by rational or irrational motives, it can clearly lead to market stress by pushing asset prices away from their fair values as supported by the economic fundamentals, hence driving up market volatility (Blasco et al, 2012). Most of the herding literature concentrates on developed markets, while other studies focus on prominent emerging markets.…”

Herding dynamics in exchange groups: Evidence from Euronext

“…Using an international sample of eighteen markets, Chiang and Zheng (2010) document strong evidence of herding in most of their sample markets (with the exception of Latin America and the US); their results suggest that herding is strong primarily during up-markets in Asian countries and that investors herd significantly towards the US market, aside from their domestic markets. Blasco et al (2012) find that intraday herding rises with volatility in the Spanish market, while, Gebka and Wohar (2013) find limited evidence of herding at the aggregate market and sector levels across thirty-two markets.…”

Applying an international CAPM to herding behaviour model for integrated stock markets

“…The researchers assert that herding behavior by market participants exacerbates market volatility and makes market instable. The empirical findings show that the existence of herding can exacerbate return volatility (Blasco et al, 2012;Demirer & Kutan, 2006;Di Guilmi et al, 2014), however, there are also studies proving that herding behavior has positive effect on return volatility (Messis & Zapranis, 2014;Venezia et al, 2011).…”