Information cascades, short-selling constraints, and herding in equity markets

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Date

2020

Authors

Iqbal, Muhammad Sabeeh
Mahmud, Syed F.

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Borsa İstanbul Anonim Şirketi

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Abstract

This paper examines the relationship between informed trading and herding in Borsa İstanbul. Our firm-level cross-sectional analysis asserts that informed trading can significantly increase future herding levels. Furthermore, we show that the relationship between informed trading and herding intensifies under short-selling restrictions. Our results confirm the predictions of the informational cascades framework where the individuals disregard their private information to follow others. We show that information cascades are relevant both for buy-side herding and sell-side herding. Short-selling restrictions may reinforce the herding behaviour since informed investors may not be able to clear out potential price misalignments.

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Herding, Informational cascades, Informed trading, Short-selling restrictions

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3

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