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Herd behavior and equity market liquidity: Evidence from major markets

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  • Galariotis, Emilios C.
  • Krokida, Styliani-Iris
  • Spyrou, Spyros I.

Abstract

This paper provides new evidence on the relation between herd behavior and equity market liquidity, an issue that has been neglected when it comes to studying herd behavior towards the consensus. We use equity price data for the G5 markets, and initially find no evidence of herding. When, however, we condition on the liquidity of stocks we find significant evidence of herd behavior for high liquidity stocks, for most countries, a result robust to different definitions of the crisis period and different measures of liquidity. The only exception is Germany for which there is weaker evidence of herding in high liquidity stocks. Variance decomposition tests indicate that the variance of the average equity market liquidity is affected by return clustering, especially during the crisis and post-crisis period an effect that is more pronounced for the US market.

Suggested Citation

  • Galariotis, Emilios C. & Krokida, Styliani-Iris & Spyrou, Spyros I., 2016. "Herd behavior and equity market liquidity: Evidence from major markets," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 140-149.
  • Handle: RePEc:eee:finana:v:48:y:2016:i:c:p:140-149
    DOI: 10.1016/j.irfa.2016.09.013
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    1. repec:eee:riibaf:v:44:y:2018:i:c:p:459-470 is not listed on IDEAS
    2. repec:eee:finana:v:53:y:2017:i:c:p:25-36 is not listed on IDEAS

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    Keywords

    Herding; Liquidity; Financial crisis; Major equity markets;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • 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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