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Herding behavior, market sentiment and volatility: Will the bubble resume?

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  • Bekiros, Stelios
  • Jlassi, Mouna
  • Lucey, Brian
  • Naoui, Kamel
  • Uddin, Gazi Salah

Abstract

This paper aims to investigate herding behavior and its impact on volatility under uncertainty. We apply a cross-sectional absolute deviation approach as well as Quantile Regression methods to capture the herding behavior in daily and monthly frequencies in US markets over several time-periods including the global financial crisis. In a novel attempt we modify the empirical CSAD herding modeling by introducing implied volatility as a measure of agent risk expectations. Our findings indicate that herding tends to be intense under extreme market conditions, as depicted in the upper high quantile range of the conditional distribution of returns. During crisis periods herding is observed at the beginning of the crisis and becomes insignificant towards the end. The US market herding behavior exhibits time-varying dynamic trading patterns that can be attributed e.g., to overconfidence or excessive “flight to quality” features, mostly observed in the aftermath of the global financial crisis. Moreover, implied volatility reveals asymmetric patterns and plays a key role in enforcing irrational behavior.

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  • Bekiros, Stelios & Jlassi, Mouna & Lucey, Brian & Naoui, Kamel & Uddin, Gazi Salah, 2017. "Herding behavior, market sentiment and volatility: Will the bubble resume?," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 107-131.
  • Handle: RePEc:eee:ecofin:v:42:y:2017:i:c:p:107-131
    DOI: 10.1016/j.najef.2017.07.005
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    More about this item

    Keywords

    Herding; Quantile regression; Implied volatility;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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