Investor-herding and risk-profiles: A State-Space Model-based Assessment

Harminder Nath () and Robert Brooks

No 9/20, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: This paper, using the Australian stock market data, examines the investor-herding and riskprofiles 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). Market volatility has a significant negative effect on PoSEH, with the most/least effect on high/low performance days of stock returns. Using quantile regression, we observe that herding and adverseherding can emerge during the worst and best performance days of stock returns, and that extreme volatility can bring herding to a near halt. The study reveals the presence of a regulated stock market environment and risk-aversion tendencies among investors.

Keywords: herd behaviour; risk aversion; state-space models; quantile regression (search for similar items in EconPapers)
JEL-codes: C31 C32 G12 G14 (search for similar items in EconPapers)
Pages: 41
Date: 2020
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Investor-herding and risk-profiles: A State-Space model-based assessment (2020)
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