Beyond the Individual: Investigating the Interdependence of Speculative Bubbles and Herding in Financial Markets

Abstract

Speculative bubbles have the potential to cause significant economic damage. It is therefore important to better understand the driving factors. This study empirically examines herding behavior as a theoretically known driver of speculative bubbles for the United States (US) stock market. First, the results suggest the presence of speculative bubbles and herding behavior within the S&P 500 stock market index. Second, it is discovered that herding behavior significantly reduces the probability of a bubble occurring. The negative influence of herding behavior can be observed for both the rate of change and for the absolute level. Analysis of the interaction effect shows that the absolute level of the herding variable moderates the rate of change. The examination of sub-hypotheses indicates that the relationship remains consistent across different industries, company sizes, sub-periods, and various time horizons, confirming the existence of the general relationship.

Keywords: Anomalies, Speculative Bubbles, Herding Behavior, Financial Markets, Behavioral Finance

JEL Classification: G10, G40, G41