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Monetary policy and herd behavior: International evidence

Styliani-Iris Krokida, Panagiota Makrychoriti and Spyros Spyrou

Journal of Economic Behavior & Organization, 2020, vol. 170, issue C, 386-417

Abstract: This paper is motivated by the recent discussion on the need of market supervisors, regulators, and policy makers, to take into account the behavioral elements of market participant attitudes and psychological and cognitive biases when taking policy decisions. We contribute to the discussion by studying, for the first time, the relationship between conventional and unconventional central bank monetary policy and herd behavior in equity markets, and argue that the transmission channel, through which monetary policy may affect herd behavior, is economic expectations and investor sentiment. We combine a range of research methodologies to measure monetary policy, herd behavior, and their possible relation, and our results indicate that conventional and unconventional Fed monetary policy explains a significant percentage of US equity market herd behavior variance, while ECB monetary policy explains a lower percentage of Eurozone herding variance. Impulse Response Functions indicate that Fed's conventional expansionary policy and non-standard policy reduces the levels of herding in the US equity market, while conventional ECB expansionary policy induces higher levels of herding in Spain and Italy. We also detect spill-over effects from Fed monetary policy to EU market herd behavior.

Keywords: Unconventional monetary policy; Herd behavior; FAVAR; Qual VAR (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G41 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:170:y:2020:i:c:p:386-417

DOI: 10.1016/j.jebo.2019.12.018

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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