The Effect of Liquidity on Herding: A Comparative Study

37 Pages Posted: 23 Jan 2016

See all articles by Emilios C. Galariotis

Emilios C. Galariotis

Audencia Business School ; Audencia Nantes School of Management

Styliani Iris Krokida

Athens University of Economics and Business - Department of Accounting and Finance

Spyros I. Spyrou

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: January 22, 2016

Abstract

This paper provides original evidence on the relation between herd behavior and equity market liquidity, an issue that has been neglected when studying herd behavior towards the consensus. We use equity price data for the G5 markets, and initially we find no evidence of herding. When, however, we condition on the daily liquidity of stocks we find significant evidence of herd behavior for days with high or medium stock liquidity, for all countries and the majority of the sub-periods. The only exception is Germany for which there is very weak evidence of herding. Variance decomposition tests indicate that the variance of the average equity market liquidity is affected by return clustering, especially during the crisis and post-crisis period and this effect is more pronounced for the US market.

Keywords: Herding, Liquidity, Financial Crisis, Major Equity Markets

JEL Classification: G02, G14, G15

Suggested Citation

Galariotis, Emilios C. and Krokida, Styliani-Iris and Spyrou, Spyros I., The Effect of Liquidity on Herding: A Comparative Study (January 22, 2016). Available at SSRN: https://ssrn.com/abstract=2720152 or http://dx.doi.org/10.2139/ssrn.2720152

Emilios C. Galariotis

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Audencia Nantes School of Management ( email )

France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Styliani-Iris Krokida

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Spyros I. Spyrou (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
218
Abstract Views
1,005
rank
178,635
PlumX Metrics