Herd Behaviour and Market Efficiency: Evidence from the Iberian Stock Exchanges

  • José Dias CURTO ISCTE - Instituto Universitário de Lisboa Business Research Unit (BRU-IUL), Lisboa, Portugal
  • Pedro Fontes FALCÃO ISCTE - Instituto Universitário de Lisboa Business Research Unit (BRU-IUL), Lisboa, Portugal
  • André Almeida BRAGA ISCTE - Instituto Universitário de Lisboa2 , Lisboa, Portugal

Abstract

The present paper examines the extent to which herd behaviour is prevalent in the Iberian stock markets using constant and time-varying coefficient estimation. An important finding is that the results obtained from using the two different methodologies for analyzing the Iberian markets lead to different conclusions, suggesting that estimates are not independent of the methodology used. Using constant coefficient methodologies no evidence of herding is found in the Spanish market suggesting a generally efficient market, however regarding the Portuguese market we find evidence of herd behaviour. On the other hand, by employing the Kalman filter, a methodology scarcely used in the study of the herding phenomenon, we find that herd behaviour presents time-varying dynamics in both Iberian markets. Additionally, the issue of a potential contagion across these two highly integrated economies is also addressed and the evidence suggests a strong spillover effect. The findings, particularly those regarding the time-varying dynamics of herding, highlight the necessity of further research given the impact of herding on market stability and particularly on portfolio risk diversification.

References

[1] Banerjee, A. 1992. A simple model of herd behavior. The Quarterly Journal of Economics, 107(3): 797-817. DOI: https://doi.org/10.2307/2118364
[2] Barberis, N., and Thaler, R. 2003. A survey of behavioral finance. In Handbook of the Economics of Finance, Chapter 18, pp. 1053-123. Amsterdam: North-Holland.
[3] Batten, J.A., and Vo, X.V. 2010. The Determinants of Equity Portfolio Holdings. Applied Financial Economics, 20 (14): 1125-1132. DOI: http://dx.doi.org/10.1080/09603101003761879
[4] Bikhchandani, S., Hirshleifer, D., and Welch, I. 1992. A theory of fads, fashion, custom, and cultural change as informational cascades. Journal of Political Economy, 100: 992-1026. DOI: https://doi.org/10.1086/261849
[5] Bikhchandani, S., and Sharma, S. 2001. Herd Behavior in Financial Markets. IMF Staff Papers, International Monetary Fund, 47: 279–310.
[6] Blasco, N., Corredor, P., and Ferreruela, S. 2011. Detecting intentional herding: what lies beneath intraday data in the Spanish stock market. Journal of the Operational Research Society, 62(6): 1056-1066. DOI: http://dx.doi.org/10.1057/jors.2010.34
[7] Caporale, G.M., Economou, F., and Philippas, N. 2008. Herding behaviour in extreme market conditions: the case of the Athens Stock Exchange. Economics Bulletin, 7: 1-13.
[8] Chang, E. C., Cheng, J. W., and Khorana, A. 2000. An examination of herd behavior in equity markets: an international perspective. Journal of Banking and Finance, 24: 1651–1679. DOI: https://doi.org/10.1016/S0378-4266(99)00096-5
[9] Chiang, T. C., and Zheng, D. 2010. An empirical analysis of herding behaviour in global stock markets. Journal of Banking and Finance, 34(8): 1911–1921. DOI: https://doi.org/10.1016/j.jbankfin.2009.12.014
[10] Chiang, T., Tan, L., Li, J., and Nelling, E. 2013. Dynamic Herding Behavior in Pacific-Basin Markets: Evidence and Implications. Multinational Finance Journal, 17: 165-200
[11] Christie, W. G., and Huang, R. D. 1995. Following the pied piper: do individual returns herd around the market? Financial Analysts Journal, 51: 31–37. DOI: https://doi.org/10.2469/faj.v51.n4.1918
[12] Cipriani, M., and Guarino, A. 2014. Estimating a structural model of herd behavior in financial markets. The American Economic Review, 104: 224-251. DOI: http://dx.doi.org/10.1257/aer.104.1.224
[13] Devenow, A., and Welch, I. 1996. Rational herding in financial economics. European Economic Review, 40: 603-615. DOI: https://doi.org/10.1016/0014-2921(95)00073-9
[14] Dhaene, J., Linders, D., Schoutens, W., and Vyncke, D. 2012. The herd behavior index: A new measure for the implied degree of co-movement in stock markets. Insurance: Mathematics and Economics, 50(3): 357-370. DOI: https://doi.org/10.1016/j.insmatheco.2012.01.005
[15] Dornbusch, R., Park, Y. C., and Claessens, S. 2000. Contagion: understanding how it spreads. The World Bank Research Observer, 15(2): 177-197. DOI: https://doi.org/10.1093/wbro/15.2.177
[16] Economou, F., Kostakis, A., and Philippas, N. 2011. Cross-country effects in herding behaviour: Evidence from four south European markets. Journal of International Financial Markets, Institutions and Money, 21 (3): 443 – 460. DOI: https://doi.org/10.1016/j.intfin.2011.01.005
[17] Fama, E. 1965. The Behavior of Stock Market Prices. Journal of Business, 38.
[18] Froot, K. A., Scharfstein, D. S., and Stein, J. C. 1992. Herd on the street: Informational inefficiencies in a market with short‐term speculation. The Journal of Finance, 47(4): 1461-1484. DOI: http://dx.doi.org/10.1111/j.1540-6261.1992.tb04665.x
[19] Gagnon, L., and Karolyi, G. A. 2006. Price and volatility transmission across borders. Financial Markets, Institutions & Instruments, 15(3): 107-158. DOI: http://dx.doi.org/10.1111/j.1468-0416.2006.00115.x
[20] Gastaldi, M., Nardecchia, A. 2003. The Kalman Filter Approach For Time-Varying β Estimation. Systems Analysis Modelling Simulation, 43(8): 1033–1042. DOI: http://dx.doi.org/10.1080/0232929031000150373
[21] Guillaume, F., and Linders, D. 2015. Stochastic modelling of herd behaviour indices. Quantitative Finance, 15(12): 1963-1977. DOI: http://dx.doi.org/10.1080/14697688.2015.1007075
[22] Hatchondo, J.C. 2008. Asymmetric Information and the Lack of International Portfolio Diversification. International Economic Review, 49(4): 1297 – 1330.
[23] Hirshleifer, D. A. 2015. Behavioral Finance. Annual Review of Financial Economics, 7: 133-159.
[24] Hirshleifer, D., and Teoh, S. H. 2003. Herd Behaviour and Cascading in Capital Markets: A Review and Synthesis. European Financial Management, 9: 25–66. DOI: http://dx.doi.org/10.1111/1468-036X.00207
[25] Holmes, P., Kallinterakis, V., and Ferreira, M. 2013. Herding in a concentrated market: a question of intent. European Financial Management 19: 497-520. DOI: http://dx.doi.org/10.1111/j.1468-036X.2010.00592.x
[26] Hong, H., and Stein, J. C. 1999. A unified theory of underreaction, momentum trading, and overreaction in asset markets. The Journal of Finance, 54(6): 2143-2184. DOI: http://dx.doi.org/10.1111/0022-1082.00184
[27] Hwang, S., and Salmon, M. 2004. Market stress and herding. Journal of Empirical Finance, 11: 585-616. DOI: https://doi.org/10.1016/j.jempfin.2004.04.003
[28] Kim, K.A., and Nofsinger, J.R. 2005. Institutional Herding, Business Groups and Economic Regimes: Evidence from Japan. Journal of Business, 78(m 1): 213–242.
[29] Lobao, J., and Serra, A. P. 2006. Herding behaviour: Evidence from Portuguese mutual Funds. Diversification and Portfolio Management of Mutual Funds, pp. 167–197. DOI: https://doi.org/10.1057/9780230626508_8
[30] Mendel, B., and Shleifer, A. 2012. Chasing noise. Journal of Financial Economics, 104: 303-320. DOI: https://doi.org/10.1016/j.jfineco.2011.02.018
[31] Mergner, S., and Bulla, J. 2008. Time-varying beta risk of pan-European industry portfolios: a comparison of alternative modeling techniques. European Journal of Finance, 14: 771-802. DOI: http://dx.doi.org/10.1080/13518470802173396
[32] Mobarek, A., Mollah, S., and Keasey, K. 2014. A Cross-Country Analysis of Herd Behavior in Europe. Journal of International Financial Markets, Institutions and Money, 32: 107-127. DOI: https://doi.org/10.1016/j.intfin.2014.05.008
[33] Ripley, D. M. 1973. Systematic elements in the linkage of national stock market indices. The Review of Economics and Statistics, 356-361
[34] Ritter, J. 2003. Behavioral Finance. Pacific-Basin Finance Journal, 11(4): 429-437.
[35] Scharfstein, D., and Stein J. 1990. Herd behavior and investment. The American Economic Review, 1990: 465-479.
[36] Shiller, R. J. 1995. Conversation, information, and herd behavior. American Economic Review, 85: 181 – 185.
[37] Shleifer, A. 2000. Inefficient Markets: An Introduction to Behavioral Finance. New York: Oxford University Press.
[38] Sias, R. W. 2004. Institutional Herding. Review of Financial Studies, 17(1): 165–206. DOI: https://doi.org/10.1093/rfs/hhg035
[39] Tan, L., Chiang, T. C., Mason, J. R., and Nelling, E. 2008. Herding behavior in Chinese stock markets: An examination of A and B shares. Pacific-Basin Finance Journal, 16: 61–77. DOI: https://doi.org/10.1016/j.pacfin.2007.04.004
[40] Vieira, E.F., and Pereira, M. S. 2015. Herding behavior and sentiment: Evidence in a small European market. Revista de Contabilidad – Spanish Accounting Review, 18(1): 78-86. DOI: https://doi.org/10.1016/j.rcsar.2014.06.003
[41] Yao, J., Ma, C. and He, W. P. 2014. Investor Herding Behavior of Chinese Stock Market. International Review of Economics and Finance. DOI: https://doi.org/10.1016/j.iref.2013.03.002
Published
2018-02-25
How to Cite
CURTO, José Dias; FALCÃO, Pedro Fontes; BRAGA, André Almeida. Herd Behaviour and Market Efficiency: Evidence from the Iberian Stock Exchanges. Journal of Advanced Studies in Finance, [S.l.], v. 8, n. 2, p. 81-93, feb. 2018. ISSN 2068-8393. Available at: <https://journals.aserspublishing.eu/jasf/article/view/1781>. Date accessed: 26 apr. 2024. doi: https://doi.org/10.14505//jasf.v8.2(16).01.
Section
Journal of Advanced Studies in Finance