William N. Goetzmann

If we have a fad, when we think stock prices are moving too much together and the stock returns are going up and the whole market is going up, that is a time period when we would expect the cross-sectional variation to be low. This is an investor euphoria, but it would also be expected with investor mass pessimism during a panic or a crash. In "normal" markets not marked by either euphoria or mass pessimism, the cross-sectional variation would be expected to be greater.

I have a data set on individual stock returns from 1816 to 1872. I find that when the market was rising, the cross-sectional standard deviation was low. When the market crashed, however, individual stocks seemed to find their own levels. This is evidence for euphoria in rising markets but not for the herding behavior of pessimistic investors during panics and crashes.