Investor Herds and Regime-Switching: Evidence from Gulf Arab Stock Markets
40 Pages Posted: 18 Sep 2012
Date Written: September 17, 2012
This paper proposes a dynamic herding approach which takes into account herding under different market regimes, with concentration on the Gulf Arab stock markets – Abu Dhabi, Dubai, Kuwait, Qatar and Saudi Arabia. Our results support the presence of three market regimes (low, high and extreme or crash volatility) in those markets with the transition order ‘low, crash and high volatility’, suggesting that these frontier markets have a different structure than developed markets. The results also yield evidence of herding behavior under the crash regime for all of the markets except Qatar which herds under the low and high volatility regimes. The findings of the cross-GCC herding model also demonstrate herding comovements and not spillovers and are also robust to the cross-GCC volatility shocks. The tests that underline the cross volatility shocks generally suggest that the crash regime is a true regime and not a statistical artifact. Policy and portfolio diversification implications are discussed.
Keywords: herding, GCC stock markets, dispersion shocks, Markov-Switching
JEL Classification: C32, G11, G15
Suggested Citation: Suggested Citation