The co-movement of stock prices, herd behaviour and high-tech mania

Abstract

This article examines the evidence of herd behaviour and stock price co-movement within high-tech stocks in the Taiwan market. We study return dispersion, volatility dispersion and directional co-movement within the industry, finding their relations with high-tech mania and extreme markets. Our empirical results demonstrate more significant evidence of return dispersion, volatility dispersion, and a higher degree of directional co-movement in high-tech industries than in traditional industries. Both return dispersion and volatility dispersion were found to have a consistent association with extreme market movements for high-tech stocks. However, the level of directional co-movement, as a modified measure of herd behaviour, is greater during extreme markets for all industries, with an asymmetric result that has great significance for herding during extreme up markets as related to down markets.

Acknowledgements

The authors thank two anonymous referees and the editor for insightful suggestions, which greatly improved this article.

Notes

¹See related theoretical studies including Culter et al. (1990), De Long et al. (1990), Banerjee (1992), Froot et al. (1992), Hirshleifer (1994) and Devenow and Welch (1996).

²The relative observations of US data are not included in this article. It can be provided under request.

³Our results are robust when we use the market-adjusted abnormal return to consider the directional co-movement of stock prices here. However, the significance will be slightly reduced.

⁴We also examined the weekly return dispersion in this study. To simplify our discussions, the observations for weekly data are not presented here, while most results are the same for weekly periods. The average weekly dispersion during our sample period was found to be 5.36%. We also observed the average weekly dispersion for high-tech industries to be 6.08%, much greater than in the traditional economic industries at 4.90%.