Data driven study of the Herd Behavior Index

In this research project, we focus on dependencies between stock prices. The Herd Behavior Index (HIX) is a measure for the degree of co-movement between stock prices composing a stock market index, such as the Dow Jones or the S&P 500. Monitoring the HIX from day to day may help to detect a market where stock prices are likely to tumble all together.

The HIX can be calculated for a stock market index as long as option on the index and its constituents are available. We can determine a HIX for major stock indices such as the Dow Jones and the S&P 500. Since the stocks in such indices represent the market as a whole, the corresponding HIX values can be interpreted as a measure for interconnectedness of the financial market. However, we can as well calculate HIX values for sector ETF’s, which provides information about the degree of systemic risk in a sector.

The goals of the research project are as follows:

  • Determine daily values of the HIX for the period 1998-2017
  • Investigate the behavior of the HIX during several extreme market conditions (9/11, Dotcom, Credit crisis, European debt crisis, Trump election, etc.)
  • Investigate the difference between volatility and herd behavior.

Students: Owen Adhikaputra, Chenna Bhumi Reddy, Sovin Birla, Da Xu

Supervisor: Daniël Linders