Three Essays on Herding and Strategic Usage of Information in Financial Markets

  • Tang Y
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Abstract

This thesis comprises of three essays that investigate herding behavior and information in financial markets. The first essay tests the theoretical information cascading model of Avery and Zemsky (1998). Using daily trade and quote data, we test specifically whether institutional investors trade together and whether correlation in trading has an impact on future prices. We find variables proxying for information asymmetry to positively predict increased levels of institutional herding at high frequencies and that herding decreases monotonically with the estimation horizon. There is evidence that days with high levels of herding are subsequently followed by price reversals but these are limited to those stocks where market makers are unlikely to adjust prices quickly believing trading is informative, consistent with the theoretical models of information cascades. In the second essay, we document significant variation in the quality of firms going public within an IPO wave. In the early stages of an IPO wave, when initial returns and IPO demand are high, the average quality of IPO stock is lower compared to the firms going public in the late stage of an IPO wave. Despite the poorer long-term performance of early movers, analysts affiliated with the underwriters provide disproportionately more positive recommendations to early movers than to late movers. The bias of affiliated analysts suggests that underwriters are less selective about the firms they take public when the market for IPOs is strong. In the third essay, we develop a new class of asset pricing models that combines the conditional dynamic correlation and equicorrelation (DCC/DECO) in the framework of the Gaussian Copula. We apply this new proposed technique to investigate the dynamics of herding behavior and stock returns. Empirically we find that (1) herding behavior is contagious; (2) herding contagion is negatively related to the stock return comovement; and (3) herding is significantly positively correlated with stock returns. In addition, we find firm size is crucial in determining the above properties: all these significant dynamic dependencies are driven by large size firms, suggesting that information travels faster among larger firms. The positive correlation among herding of individual stocks and the positive relation between herding and returns suggest that herding is a potential risk factor in asset pricing.

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APA

Tang, Y. (2010). Three Essays on Herding and Strategic Usage of Information in Financial Markets. Unpublished PhD Thesis. Retrieved from http://search.proquest.com/docview/869301515?accountid=79789

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