Abstract

This paper provides new evidence on herding behavior. Using daily frequency data for 336 US listed firms over a five-year period, we investigate three important elements of financial herding behavior. First, trading volume, representing market interest, as a significant variable in capital markets apart from stock prices. Second, herding dynamics since herding formation is a dynamic process. Third, the reaction of possible financial herding to exogenous events-threats, as we use the pandemic event in order to investigate a market under stress. Even though the benchmark herding model used does not provide evidence of herding behavior, our results verify the significance of the above herding elements. We also find that trading volume and positive changes in trading volume result in increased cross-sectional absolute deviation (CSAD). Most importantly, we find that herding behavior is evident during the COVID-19 pandemic confirming that investors tend to herd during major crisis periods.

Most importantly though, according to our results, herding behavior is evident during the COVID-19 sub-period, while an asymmetric behavior is documented with reference to high new COVID-19 cases. This confirms that people tend to herd in the appearance of a danger factor, as this is observed in animals in the presence of a predator.

Asset managers and portfolio investors alike could benefit from these findings as they could form relevant positions in the market anticipating events that could cause herding. Momentum seekers can be rest assured that crisis events would trigger herding and they should either follow the drift or act proactively.

Extensions of the present work could focus further towards how non-financial risks may affect herding behavior, with particular emphasis being shed on many political and hygienic events that trigger investment response.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgements

We would like to thank two anonymous reviewers and the editor for their constructive comments and suggestions, which improved the quality of our paper.

Data availability

Data will be made available on request.