Herding and excessive risk in the American stock market: A sectoral analysis

• We verify if herding is a driving force of excessive market risk and bubbles.
• Herding is investigated in every sector for all American listed companies.
• Trading volume turnover and investors’ sentiment fuel herding movement.
• Herding enhances financial bubbles and crises only in some sectors.
• Herding and trading volume inhibit market volatility in large markets.

This paper aims to test whether herding behavior is a driving force of excessive market volatility and increasing bubbles in the US stock market at a sectoral level. Trading volume turnover and investors’ sentiment are ubiquitous factors besides market return to fuel herding movement in most sectors. Our sample covers all listed companies in the American stock market over four major turmoil periods. Granger causality test shows that herding is a vital ingredient to increasing bubbles in some sectors, but not all. Moreover, herding and trading volume have an inhibiting effect on both overall and in-sector market volatility in large markets, as opposed to concentrated markets commonly studied in the literature.