Herd behavior towards the market index: Evidence from 21 financial markets
AbstractThis paper uses the cross-sectional variance of the betas to study herd behavior towards the market index in major developed and emerging financial markets (categorized as Developed group, Asian group, and Latin American group). We propose a robust regression technique to calculate the betas of the CAPM and those of the Fama-French three-factor model, with to the aim of diminishing the impact of multivariate outliers in return data. Through the estimated values obtained from a state space model, we examine the evolution of herding measures, especially their pattern around sudden events such as the 1997-1998 financial crises. This 1997-1998 turmoil turns out to have formed a turning point for most of the financial markets. We document a higher level of herding in emerging markets than in developed markets. We also find that the correlation of herding is higher between two markets from the same group than between two markets from different groups. This paper sheds light on the calculation of beta and on the financial policy to understand the dynamics of herding in financial markets.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/776.
Length: 41 pages
Date of creation: 05 Dec 2008
Date of revision:
Herding; Outlier; Robust Regression; Cycle;
Find related papers by JEL classification:
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-22 (All new papers)
- NEP-FMK-2009-02-22 (Financial Markets)
- NEP-SEA-2009-02-22 (South East Asia)
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