Does herding behavior explain the contagion of the COVID-19 crisis?

Abstract

Purpose

The objective of this paper is to investigate the pandemic’s function as a driver of investor herding in international stock markets, given that the current coronavirus disease 2019 (COVID-19) crisis has caused a large rise in uncertainty.

Design/methodology/approach

The paper investigates the presence of herding behavior among the developed and BRICS (Brazil, Russia, India, China and South Africa) stock market indices during the COVID-19 crisis, by using a modified Cross-Sectional Absolute Deviation (CSAD) measure which is considered a proxy for herding and the wavelet coherence (WC) analysis between CSAD that captures the different inter-linkages between stock markets.

Findings

Using the CSAD model, the authors' findings indicate that the herding behavior of investors is present in stock markets during the four waves of COVID-19 crisis. The results also demonstrate that the transaction volume improve the herding behavior in the stock markets. As for the news concerning the number of cases caused by the pandemic, the results show that the pandemic does not stimulate herding; however, the number of deaths caused by this pandemic turns out to be a great stimulator of herding. By using the WC analysis, the authors' findings indicate the presence of herding behavior between the Chinese and stock markets (developed and emerging), especially during the first wave of the crisis and the presence of herding behavior between the Indian and stock markets (developed and emerging) in the medium and long run, especially during the third wave of the COVID-19 crisis.

Originality/value

The authors' study is among the first that examines the influence of the recent COVID-19 pandemic as a stimulator of herding behavior between stock markets. The study also uses the WC analysis next to the CSAD model to obtain robust results. The authors' results are consistent with the mental bias of behavioral finance where herding behavior is considered effective in volatility predictions and decision-making for international investors, specifically during the COVID-19 crisis.

Citation

Ghorbel, A., Snene, Y. and Frikha, W. (2023), "Does herding behavior explain the contagion of the COVID-19 crisis?", Review of Behavioral Finance, Vol. 15 No. 6, pp. 889-915. https://doi.org/10.1108/RBF-12-2021-0263