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Better ways to test for herding

Wang, Junkai; Hudson, Robert

Authors

Junkai Wang



Abstract

In this article, we outline problems with the standard test for herding developed by Chang, Cheng and Kohrana (2000), subsequently called the CCK test, which is based on the proposition that the cross-sectional absolute deviation of stock returns (CSAD) should be linearly related to overall market returns. We show that the test is highly biased against finding herding. The bias arises because the test assumes that, in the absence of herding, stock prices follow the Capital Asset Pricing Model (CAPM) but does not account for the implications of the CAPM not being a perfect asset pricing model. We suggest several simple alternative tests for herding. Finally, we show that the new tests give radically different results to the CCK test finding herding in many of the world's major financial markets when the CCK test rejects herding.

Citation

Wang, J., & Hudson, R. (2022). Better ways to test for herding. International journal of finance & economics : IJFE, https://doi.org/10.1002/ijfe.2707

Journal Article Type Article
Acceptance Date Sep 11, 2022
Online Publication Date Sep 27, 2022
Publication Date 2022
Deposit Date Sep 13, 2022
Publicly Available Date Sep 28, 2024
Journal International Journal of Finance and Economics
Print ISSN 1076-9307
Electronic ISSN 1099-1158
Publisher Wiley
Peer Reviewed Peer Reviewed
DOI https://doi.org/10.1002/ijfe.2707
Public URL https://hull-repository.worktribe.com/output/4076132

Files

This file is under embargo until Sep 28, 2024 due to copyright reasons.

Contact Robert.Hudson@hull.ac.uk to request a copy for personal use.



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