Do investors follow the herd in option markets?
Bernales, Alejandro Verousis, Thanos Voukelatos, Nikolaos
Bernales, Alejandro
Verousis, Thanos
Voukelatos, Nikolaos
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Publication Type
Journal article with impact factor
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Supervisor
Publication Year
2020
Journal
Journal of Banking & Finance
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Publication Volume
119
Publication Issue
October
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Abstract
We investigate the previously unexplored herding behaviour of investors in option markets, by examining equity option contracts traded in the US between 1996 and 2012. We document strong herding effects in option trading activity that are conditional on a set of systematic factors related to periods of market stress. More specifically, we find that option investors tend to herd during periods of high market volatility risk, on dates of macroeconomic announcements, during the financial crisis of 2008, when a large number of market option positions is either opened or closed, and during periods of a large average dispersion of analysts’ forecasts.
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Keywords
Herding, Cross-Sectional Dispersion, Options