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

40 Pages Posted: 10 Jan 2013

See all articles by Mehmet Balcilar

Mehmet Balcilar

Eastern Mediterranean University

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Shawkat M. Hammoudeh

Montpellier Business School; Drexel University - Lebow College of Business

Ahmed A.A. Khalifa

King Fahd University of Petroleum & Minerals (KFUPM)

Date Written: January 10, 2013

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 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 risk factors 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.

Keywords: Herding, Gulf Arab Stock Markets, Dispersion Shocks, Markov-Switching

JEL Classification: C32, G11, G15

Suggested Citation

Balcilar, Mehmet and Demirer, Riza and Hammoudeh, Shawkat M. and Khalifa, Ahmed A.A., Do Global Shocks Drive Investor Herds in Oil-Rich Frontier Markets? (January 10, 2013). Available at SSRN: https://ssrn.com/abstract=2199136 or http://dx.doi.org/10.2139/ssrn.2199136

Mehmet Balcilar

Eastern Mediterranean University ( email )

Gazimagusa
Turkey

HOME PAGE: http://www.mbalcilar.net

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3144
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF)

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Shawkat M. Hammoudeh

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Drexel University - Lebow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States
2158956673 (Phone)
2158956975 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/HammoudehS/

Ahmed A.A. Khalifa

King Fahd University of Petroleum & Minerals (KFUPM) ( email )

Dhahran, 31261
Saudi Arabia
+96638607082 (Phone)
+96638602585 (Fax)

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