Investor-herding and risk-profiles: A State-Space model-based assessment

Harmindar B. Nath and Robert Brooks

Pacific-Basin Finance Journal, 2020, vol. 62, issue C

Abstract: This paper, using the Australian stock market data, examines the investor-herding and risk-profiles link that has implications for asset pricing, portfolio diversification and foreign investments. As investors may herd towards a specific factor, sector or style to combat market conditions for optimizing investment returns, examining such herding can reveal investors' risk profiles. We employ State-Space models for extracting time series of herd dynamics and the proportion of signal explained by herding (PoSEH). The possibility of a leverage effect between market returns and volatility and its implications are discussed. The change in market volatility strengthens PoSEH; its impact is maximum on high return days of stocks. Quantile regression analysis shows that herding and adverse herding can emerge during the worst and best performance days of stock returns, but extreme uncertainty can bring both herding behaviours to a near halt. The study reveals the presence of a regulated stock market environment and the change in volatility and risk-aversion as the determinants of herding behaviour.

Keywords: Herd behaviour; Risk aversion; State-Space models; Quantile regression; Leverage effect (search for similar items in EconPapers)
JEL-codes: C31 C32 G12 G14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Investor-herding and risk-profiles: A State-Space Model-based Assessment (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:62:y:2020:i:c:s0927538x2030055x

DOI: 10.1016/j.pacfin.2020.101383

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