Herding and Positive Feedback Trading in American Stock Market: A Two Co-directional Behavior of Investors

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