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Time-varying herding behavior within the Eurozone stock markets during crisis periods: Novel evidence from a TVP model

Stavros Stavroyiannis (Department of Accounting and Finance, University of Peloponnese, Kalamata, Greece)
Vassilios Babalos (Department of Accounting and Finance, University of Peloponnese, Kalamata, Greece)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 15 July 2019

Issue publication date: 12 June 2020

Abstract

Purpose

Motivated by the ongoing debate on the existence and magnitude of herding in financial markets, the purpose of this paper is to examine Eurozone stock markets for herding behavior. In the context of the present study, the authors seek for herding behavior of stock markets as a whole as opposed to previous studies that examine herding on stock level.

Design/methodology/approach

To this end, the authors employ data on benchmark stock market indices for a long sample starting from 2000 through 2016. The testing procedure entails the standard Capital Asset Pricing Model-based procedure along with an advanced econometric method allowing the coefficients of the model to vary over time.

Findings

Results provide evidence in favor of negative herding behavior (anti-herding) for the Eurozone as a whole with noteworthy transitions. Further analysis reveals that stock markets of the periphery exhibit scarce evidence of herding, whereas continental countries are mainly characterized by negative herding behavior.

Originality/value

The present study’s main contribution is twofold. First, herding is examined not in sector or stock level as previous studies but at market level. Second, the testing methodology entails a pure time-varying regression model with stochastic volatility proposed by Nakajima (2011) that has not been previously employed in stock market herding. The results entail significant implications for investors seeking for diversification across Eurozone stock markets.

Keywords

Acknowledgements

The authors would like to thank the editor and an anonymous reviewer for their comments that helped improve the paper.

Citation

Stavroyiannis, S. and Babalos, V. (2020), "Time-varying herding behavior within the Eurozone stock markets during crisis periods: Novel evidence from a TVP model", Review of Behavioral Finance, Vol. 12 No. 2, pp. 83-96. https://doi.org/10.1108/RBF-07-2018-0069

Publisher

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Emerald Publishing Limited

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