Investigating macro herd behaviour: evidence from publicly traded German companies

Sándor Erdős and Patrik László Várkonyi

Review of Behavioral Finance, 2023, vol. 16, issue 2, 266-281

Abstract: Purpose - The purpose of this study is to examine herd behaviour under different market conditions, examine the potential impact of the firm size and stock characteristics on this relationship, and explore how herding affects market prices in the German market. Design/methodology/approach - The authors apply a method that does not rely on theoretical models, thus eliminating the biases inherent in their application. This technique is based on the assumption that macro herding manifests itself in the synchronicity (comovement) of stock returns. Findings - The study’s findings show that herding is more pronounced in down markets and is more pronounced when market returns reach extreme levels. Additionally, the authors have found that there is stronger herding among large companies compared to small companies, and that stock characteristics considered have no effect on the degree of macro herding. Results also suggest that the contemporaneous market-wide information drives macro herding and that macro herding facilitates the incorporation of market-wide information into prices. Practical implications - The study’s results strongly support the idea of directional asymmetry, which holds that stocks react quickly to negative macroeconomic news while small stocks react slowly to positive macroeconomic news. Additionally, the study’s results suggest that the contemporaneous market-wide information drives macro herding and that macro herding facilitates the rapid incorporation of market-wide information into prices. Originality/value - To the best of the researchers’ knowledge, this is the first study that examines macro herding for a major financial market using a herding measure based on the co-movement of returns that does not rely on theoretical models.

Keywords: Herd behaviour; Macro herding; Size effect; Stock characteristics; Price impact (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-03-2023-0061

DOI: 10.1108/RBF-03-2023-0061

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