Exploitable Retail Trader Herding?

Is there evidence of investor herding in the variation of return correlations for individual stocks? In their January 2011 paper entitled “Asymmetric Correlations”, Tarun Chordia, Amit Goyal and Qing Tong investigate when and why return correlations for individual stocks vary over time. At the end of each month, they calculate average pairwise correlations of stocks at a daily frequency over the month. Using daily returns for all NYSE common stocks, along with contemporaneous stock trading data and firm characteristics, from January 1963 through December 2008, they find that: (more…)