Herding behaviour and market dynamic volatility: evidence from the US stock markets

Abstract

This paper documents the effect of herd behaviour on the US S%P100 and US DJIA stock market's stocks volatility. We investigated the presence and the change of herding behaviour in the US S%P100 and US DJIA stock markets during January 2000 to July 2012. Results provide strong and coherent evidence on the occurrence of herding at only daily frequency. In particular, the findings indicated a significant change in herding tendency across sub-periods of the subprime crisis. The different tests report that herding is only prevailing during bull period and during days of high trading volumes. Moreover, empirical evidences report a significant relationship between market sentiment and herd behaviour. We show that herding contributes not only in fuelling market excessive volatility but also in raising the housing bubble during the subprime crisis. Surprisingly, we find that asymmetric herding exists during days of low volatility.