Herd behavior in financial markets is one example of the existence of inefficient markets. It is the tendency for individuals to mimic the actions (rational or irrational) of other investors. To model herd behavior, there are several models that empirical researchers have used. The most commonly used models are Christie and Huang (1995) and Change et al. (1999).
Our Stata Code
We have developed easy to use yet robust codes for estimating herd behavior using the above-mentioned models. Specifically, our codes estimate cross-sectional standard deviation of returns (CSSD) as a measure of the average proximity of individual asset returns to the realized market average CSSD (Christie and Huang 1995); and cross-sectional absolute deviation of returns, i.e., CSAD of Change et al. (1999). The codes need just a basic understanding of Stata. Further, our comments with each line of code will surely help you to not only apply the code but also understand the process more clearly.
Code for 2 models (variations) is available for $199, plus a $50 for raw data processing (in case the data is not in Stata format and variables are not already constructed). For further details, please contact us at:
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- Christie, W. G., & Huang, R. D. (1995). Following the pied piper: Do individual returns herd around the market?. Financial Analysts Journal, 51(4), 31-37.
- Chang, E. C., Cheng, J. W., & Khorana, A. (2000). An examination of herd behavior in equity markets: An international perspective. Journal of Banking & Finance, 24(10), 1651-1679.