Time Varying Herding and Anti-Herding Behavior and Dynamic Conditional Correlations in European Market Indices

Abstract

We examine the existence of herding and anti-herding (positive herding) behavior in major European benchmarking stock market indices. Following the recent events that unfolded in the Eurozone sovereign debt crisis our analysis is further expanded on two subsamples namely north and south European countries. In order to identify any time-dependent properties reflected in time-varying parameters, we employ an overlapping rolling window regression of varying window sizes. The empirical evidence confirms a herding behavior during the global financial crisis for the South countries, and anti-herding behavior for both North and South subsets before and after the shock, independent of the window size. The herding and anti-herding behavior, are explained with the use of dynamic conditional correlation via DCC-GARCH family multivariate modeling. The results indicate that the correlations have recorded a significant decrease before and after the crisis for both North and South subsamples, accounting for the anti-herding behavior, whereas correlations for the South countries during the crisis have increased, thus justifying the herding behavior. Our results entail significant implications for international portfolio diversification strategies.

Keywords: Behavioral Finance, Herding and anti-herding behavior, Cross sectional absolute dispersion, Rolling window regression, Dynamic conditional correlations

JEL Classification: C22, C32, G01, G02, G14, G15