Institutional Herding and Information Cascades : Evidence from Daily Trades

Using daily trade and quote data, we test whether institutional trading patterns are consistent with Avery and Zemsky's (1998) theoretical model of information cascades. Consistent with theory, we find variables proxying for information asymmetry to positively predict increased levels of institutional herding at high frequencies and that herding levels increase when estimated over shorter horizons. Days with high levels of herding are subsequently followed by price reversals but these are limited to those stocks where trading is believed to be informative. The paper also shows that the daily trade and quote data provides similar estimates of herding as previously estimated from quarterly holdings data