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Intentional and spurious herding behavior: A sentiment driven analysis

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  • Filip, Angela Maria
  • Pochea, Maria Miruna

Abstract

By using several Thomson Reuters MarketPsych Indices, this paper explores the nexus between investors’ sentiments and herding behavior in the U.S. and Europe stock markets from January 2005 to June 2021. We apply the state–space model approach of Hwang and Salmon (2004), controlling for changes in investors’ emotionality, and document that herding is a persistent phenomenon in both markets. These effects remain robust when using the alternative methodology of Chang et al. (2004). Moreover, we find evidence of herding behavior under both extreme positive and negative sentiments, with a conspicuous effect on euphoria days, particularly in the U.S. market.

Suggested Citation

  • Filip, Angela Maria & Pochea, Maria Miruna, 2023. "Intentional and spurious herding behavior: A sentiment driven analysis," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    • Handle: RePEc:eee:beexfi:v:38:y:2023:i:c:s2214635023000242
    DOI: 10.1016/j.jbef.2023.100810
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    More about this item

    Keywords

    Herding behavior; Thomson Reuters MarketPsych Indices (TRMI); Investors’ sentiments; Cross-sectional standard deviation of betas; Cross-sectional absolute deviation of returns;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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