Herding behaviour towards high order systematic risks and the contagion Effect—Evidence from BRICS stock markets

Yi Zhang, Long Zhou, Zhidong Liu and Baoxiu Wu

The North American Journal of Economics and Finance, 2024, vol. 74, issue C

Abstract: This paper investigates the existence of herding movements towards several systematic risk factors derived from the Capital Asset Pricing Model (CAPM) and its extensions. The measure of herding is estimated using the dispersion of the risk factor loadings. The state space model is employed to extract time series of herding dynamics. We empirically survey the herding behaviors in the BRICS stock markets (i.e., Brazil, Russia, India, China, and South Africa) using monthly stock index data from 2006 to 2022, and identify various herding patterns towards specific factors. We also examine the impact of unanticipated shocks in crucial macroeconomic variables on the degree of herding measure in these countries. Lastly, we test the contagion hypothesis of herding across markets using correlation analysis. The results show that the level of herding linkages increases significantly in periods of market stress, casting doubt on the effectiveness of asset allocation in these markets for the sake of diversity.

Keywords: Higher moment CAPM; Herding movement; State space model; Macroeconomic shocks; Herding contagion (search for similar items in EconPapers)
JEL-codes: G11 G15 G19 G31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:74:y:2024:i:c:s106294082400144x

DOI: 10.1016/j.najef.2024.102219

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