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Do Global Shocks Drive Investor Herds in Oil-Rich Frontier Markets?

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Listed:
  • Mehmet Balcilar
  • Riza Demirer
  • Shawkat Hammoudeh

    (Lebow College of Business-Drexel University)

  • Ahmed Khalifa

Abstract

This paper examines the dynamic relationship between global factors and herding behavior in the oil-rich frontier stock markets of the Gulf Cooperation Council (GCC), using a time-varying transition probability Markov-switching model (TVTP-MS). Our results suggest that the GCC frontier stock markets respond significantly to the global market conditions in two distinct ways: (i) global fundamentals and market factors play a significant role in determining volatility regimes in these frontier markets as well as their transitions from one regime to another; and (ii) shocks in global systematic financial risks significantly contribute to investor herding in these frontier markets. Higher levels of global risk indexes including the VIX and the FSI as well as positive changes in the U.S. stock market performance and in the price of oil govern the transitions out of low into higher volatility states during which herding behavior is found to be present. Finally, we discuss policy and portfolio diversification implications.

Suggested Citation

  • Mehmet Balcilar & Riza Demirer & Shawkat Hammoudeh & Ahmed Khalifa, 2013. "Do Global Shocks Drive Investor Herds in Oil-Rich Frontier Markets?," Working Papers 819, Economic Research Forum, revised Dec 2013.
    • Handle: RePEc:erg:wpaper:819
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    2. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2015. "Global risk exposures and industry diversification with Shariah-compliant equity sectors," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 499-520.
    3. Byomakesh Debata & Jitendra Mahakud, 2018. "Economic policy uncertainty and stock market liquidity," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 10(1), pages 112-135, April.
    4. Omokolade Akinsomi & Yener Coskun & Rangan Gupta & Chi Keung Marco Lau, 2016. "Impact of Volatility and Equity Market Uncertainty on Herd Behavior: Evidence from UK REITs," Working Papers 201688, University of Pretoria, Department of Economics.
    5. Ali GÜVERCİN, 2016. "Sentimental Herding: The Role of Regional and Global Shocks in Egyptian and Saudi Stock Markets," Sosyoekonomi Journal, Sosyoekonomi Society, issue 24(27).

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