Financial Market Determinants of Dynamic Herding in North-American Energy Market

Abstract

This study analyses the dynamics of intentional and fundamental herding and its non-linear determinants in the North-American energy market using state-space models and quantile-on-quantile regression technique. Our findings demonstrate significant presence of herding in North-American energy market without any exception to global financial crisis, COVID-19, lockdown, and post-lockdown episodes. It's worth noting that herding is mainly motivated by intentional drivers rather than fundamental factors in all of these scenarios. Our results also show a herding asymmetry during bullish and bearish market conditions but herding during bullish (bearish) market condition is mainly driven by the intentions (fundamentals). The results of our quantile-on-quantile regression show that the effects of macroeconomic variables on time-varying herding are in fact regime specific. We generally find evidence of herding (anti-herding) at the lower (upper) quartiles of energy market liquidity, oil price shocks, oil market implied volatility and economic policy uncertainty. It is interesting to note that in all these cases, herding is dominantly driven by intentional motives rather than fundamental analysis. The investment community engaged into the North-American energy stocks can benefit from our study as awareness about regime specific effects of various market variables on intentional (fundamental) herding can be a useful input in formulating asset allocation and hedging strategies. The outcome of our study may provide interesting input to regulators to develop the dynamic legislative framework focusing on the policies to encourage the investment diversification during regime specific systemic risk escalation resulting from dynamic behavior of herding and macroeconomic variables.

Keywords: Energy stocks; Herding behavior; State-Space Model; Quantile-on-quantile regression; Financial markets.

JEL Classification: C31, G01, G11, G14, G15, M14, Q43