Herding and feedback trading: Evidence on their relationship at the macro level

Abstract

The behavioural expressions of herding and feedback trading maintain properties that render their coexistence a possibility. Although their joint presence has been largely confirmed by empirical work in the Finance literature at the micro level (i.e. using micro data), the pursuit of this issue at the macro level (i.e. the level of the aggregate market) has remained largely unexplored. To that end, we jointly test for herding and feedback trading at the market level using data from the Portuguese market for the 1993-2005 period. Our results indicate the combined significant presence of herding and positive feedback trading for that period, with this significance exhibiting signs of clustering during the second half of the 1990s, which accommodated a series of boom-bust episodes for that market.