Option-implied information and stock herding

Abstract

In this paper, we examine if herding behaviour in the equity market can be explained by option-implied information. Our empirical results confirm the commonly reported absence of herding as a general tendency in the U.S. equity market. However, we find evidence of significant herding behaviour during periods when option-implied information reflects a pessimistic view about the future prospects of the equity market. More specifically, we find that individual stock returns tend to cluster more closely around the market consensus during days of high implied index volatility, more pronounced negative implied skewness, and higher trading volume in index puts.