Herding states and stock market returns

Filipe Costa, Natércia Fortuna and Júlio Lobão

Research in International Business and Finance, 2024, vol. 68, issue C

Abstract: This paper investigates whether herd behaviour states (intense/adverse) affect stock market returns using a fixed effects model to capture cross-sectional and time variability covering the European region. We show that stock market returns depend on past herding states. From December 1992 to December 2020, the mean returns following an intense herding state are 0.26% lower per month over a six-month holding period than following an adverse herding state. Our results are robust to using risk-adjusted returns and a continuous herding variable. We also show that intense herding emerges during periods of lower returns and higher volatility than adverse herding.

Keywords: Herding behaviour; Cross-sectional dispersion of stock returns; European equity markets; State–space models (search for similar items in EconPapers)
JEL-codes: C32 G12 G15 G40 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:68:y:2024:i:c:s0275531923002891

DOI: 10.1016/j.ribaf.2023.102163

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