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Herd behavior towards the market index: Evidence from 21 financial markets

  • Wang, Daxue

    ()

    (IESE Business School)

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    This 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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    Paper provided by IESE Business School in its series IESE Research Papers with number D/776.

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    Length: 41 pages
    Date of creation: 05 Dec 2008
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0776
    Contact details of provider: Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/

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    16. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, 08.
    17. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
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    19. Arnold Stromberg, . "Why Write Statistical Software? The Case of Robust Statistical Methods," Journal of Statistical Software, American Statistical Association, vol. 10(i05).
    20. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
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