The Herd Behavior Index and predicting market fear

The past has learned that stock prices tend to move together. Moreover, at moments of high market fear, this co-movement is stronger and stock prices move predominantly downwards. In such a market situation, diversification benefits dry up and stock picking does not help to protect an investment portfolio.

In this project we implement the Herd Behavior Index, also called HIX, which was invented in Dhaene et al. (2012). The HIX is an option-implied measure taking values between 0 and 1, which can be calculated daily. If at a certain day, the HIX is close to 1, this is a sign that stock prices are likely to move together in the near future. 

The aim of this project is to determine values of the HIX for the S&P 100 between 1996 and 2017. A next step is to study the time series of the HIX and investigate the behavior of the HIX in times of market stress (i.e. during the dot-com bubble, 9/11 attacks, European debt crisis, Lehman brother, Brexit, etc.). Moreover, we compare the HIX with the VIX (the volatility index). The HIX and the VIX are very similar, but whereas the VIX measures volatility, the HIX measures co-movement. 

Students: Owen Adhikaputra, Supasin Chalermpoonsup, Zhihan Hui, Da Xu, Yi Yuan

Supervisor: Daniël Linders