Following the Crowd: Unveiling the Impact of Macroeconomic Shocks and Monetary Policy Shifts on Herding Dynamics in the Bangladesh Equity Market

Muhammad Enamul Haque () and Mahmood Osman Imam
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Muhammad Enamul Haque: School of Business and Economics, United International University, Madani Avenue, Dhaka 1212, Bangladesh
Mahmood Osman Imam: Department of Finance, Dhaka University, Nilkhet Road, Dhaka 1000, Bangladesh

Economies, 2025, vol. 13, issue 11, 1-23

Abstract: The study examines the dynamics of herding behavior in relation to macroeconomic shocks and monetary policy shifts in the Bangladesh equity market. By employing robust empirical methodologies across distinct market states including bullish, bearish, crisis, extended crisis, and COVID-19 phases, we first demonstrate that herding prevails under conditions of heightened uncertainty. Based on this foundation, we examine how exchange rate fluctuations and interest rate shifts alongside changes in deposit rates and reserve requirements serve as catalysts for collective investor behavior. The findings demonstrate that depreciation of the domestic currency and reductions in interest rates result in significant intensification of herding during vulnerable market phases. Moreover, monetary policy adjustments, predominantly changes in deposit rates and reserve ratios, trigger coordinated trading responses, especially during bearish and crisis markets. These results reveal the profound sensitivity of frontier equity markets to macro-financial signals and underscore the critical role of policy communication and stability in mitigating destabilizing herd dynamics. By bridging macroeconomic policy and investor psychology in a frontier market context, this research offers practical insights that can help regulators and policymakers improve market resilience.

Keywords: herding behavior; macroeconomic shocks; effects of monetary policy; frontier equity market; financial market (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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