According to rational expectation models, uninformed or liquidity trading make market price volatility rise. This paper sets out to analyse the impact of herding, which may be interpreted as one of the components of uninformed trading, on the volatility of the Spanish stock market. Herding is examined at the intraday level, considered the most reliable sampling frequency for detecting this type of investor behavior, and measured using the Patterson and Sharma (Working Paper, University of Michigan–Dearborn, 2006) herding intensity measure. Different volatility measures (historical, realized and implied) are employed. The results confirm that herding has a direct linear impact on volatility for all of the volatility measures considered, although the corresponding intensity is not always the same. In fact, herding variables seem to be useful in volatility forecasting and therefore in decision making when volatility is considered a key factor.

This paper examines the intentional herd behaviour of market participants within different international markets (Germany, United Kingdom, United States, Mexico, Japan, Spain and France) using a new approach that permits the detection of even moderate herding over the whole range of market return. This approach compares the cross-sectional deviation of returns of each of the selected markets with the cross-sectional deviation of returns of an “artificially created” market free of herding effects. We suggest that intentional herding is likely to be better revealed when we analyse familiar stocks. The results show that only the Spanish market exhibits a significant herding effect.

Journal of the Operational Research Society (JORS) is the world's longest established OR journal and an official journal of The OR Society. It is the aim of the Journal to present papers which are relevant to practitioners, researchers, teachers, students and consumers of operational research, and which cover the theory, practice, history or methodology of OR.