Abstract

Using aggregate data from DJIA since 1987, this paper attempts to address two potential co-directional
behaviors of investors: Herding and positive feedback trading. These behavioral patterns bear interesting
implications for market price as they may lead to excess volatility and mispricing. To empirically test for herding
behavior, we employ two econometric techniques: the Cross Sectional Standard Deviation (CSSD) and the cross
sectional absolute standard deviation (CSAD), while we employ the model formally introduced by Sentana and
Wadhwani (1992) to empirically test for positive feedback trading. Our results support the joint significant
presence of herding and positive feedback trading behaviors during periods of relatively large market price
movements.

This work is licensed under a Creative Commons Attribution 4.0 License.