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Monetary policy and herd behavior: International evidence

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  • Krokida, Styliani-Iris
  • Makrychoriti, Panagiota
  • Spyrou, Spyros

Abstract

This paper is motivated by the recent discussion on the need of market supervisors, regulators, and policy makers, to take into account the behavioral elements of market participant attitudes and psychological and cognitive biases when taking policy decisions. We contribute to the discussion by studying, for the first time, the relationship between conventional and unconventional central bank monetary policy and herd behavior in equity markets, and argue that the transmission channel, through which monetary policy may affect herd behavior, is economic expectations and investor sentiment. We combine a range of research methodologies to measure monetary policy, herd behavior, and their possible relation, and our results indicate that conventional and unconventional Fed monetary policy explains a significant percentage of US equity market herd behavior variance, while ECB monetary policy explains a lower percentage of Eurozone herding variance. Impulse Response Functions indicate that Fed's conventional expansionary policy and non-standard policy reduces the levels of herding in the US equity market, while conventional ECB expansionary policy induces higher levels of herding in Spain and Italy. We also detect spill-over effects from Fed monetary policy to EU market herd behavior.

Suggested Citation

  • Krokida, Styliani-Iris & Makrychoriti, Panagiota & Spyrou, Spyros, 2020. "Monetary policy and herd behavior: International evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 386-417.
  • Handle: RePEc:eee:jeborg:v:170:y:2020:i:c:p:386-417
    DOI: 10.1016/j.jebo.2019.12.018
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    More about this item

    Keywords

    Unconventional monetary policy; Herd behavior; FAVAR; Qual VAR;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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