Business cycle and herding behavior in stock returns: theory and evidence
Abstract This study explains the role of economic uncertainty as a bridge between business cycles and investors’ herding behavior. Starting with a conventional stochastic differential equation representing the evolution of stock returns, we provide a simple theoretical model and empirically demonstr...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
SpringerOpen
2024-01-01
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| Series: | Financial Innovation |
| Subjects: | |
| Online Access: | https://doi.org/10.1186/s40854-023-00540-z |
| _version_ | 1827388210675712000 |
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| author | Kwangwon Ahn Linxiao Cong Hanwool Jang Daniel Sungyeon Kim |
| author_facet | Kwangwon Ahn Linxiao Cong Hanwool Jang Daniel Sungyeon Kim |
| author_sort | Kwangwon Ahn |
| collection | DOAJ |
| description | Abstract This study explains the role of economic uncertainty as a bridge between business cycles and investors’ herding behavior. Starting with a conventional stochastic differential equation representing the evolution of stock returns, we provide a simple theoretical model and empirically demonstrate it. Specifically, the growth rate of gross domestic product and the power law exponent are used as proxies for business cycles and herding behavior, respectively. We find stronger herding behavior during recessions than during booms. We attribute this to economic uncertainty, which leads to strong behavioral bias in the stock market. These findings are consistent with the predictions of the quantum model. |
| first_indexed | 2024-03-08T16:13:56Z |
| format | Article |
| id | doaj.art-0805528b2c994aa386b37d01c534979b |
| institution | Directory Open Access Journal |
| issn | 2199-4730 |
| language | English |
| last_indexed | 2024-03-08T16:13:56Z |
| publishDate | 2024-01-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj.art-0805528b2c994aa386b37d01c534979b2024-01-07T12:41:01ZengSpringerOpenFinancial Innovation2199-47302024-01-0110111410.1186/s40854-023-00540-zBusiness cycle and herding behavior in stock returns: theory and evidenceKwangwon Ahn0Linxiao Cong1Hanwool Jang2Daniel Sungyeon Kim3Yonsei UniversityMcGill UniversityGlasgow Caledonian UniversityChung-Ang UniversityAbstract This study explains the role of economic uncertainty as a bridge between business cycles and investors’ herding behavior. Starting with a conventional stochastic differential equation representing the evolution of stock returns, we provide a simple theoretical model and empirically demonstrate it. Specifically, the growth rate of gross domestic product and the power law exponent are used as proxies for business cycles and herding behavior, respectively. We find stronger herding behavior during recessions than during booms. We attribute this to economic uncertainty, which leads to strong behavioral bias in the stock market. These findings are consistent with the predictions of the quantum model.https://doi.org/10.1186/s40854-023-00540-zHerd behaviorBusiness cycleEconomic uncertaintyQuantum modelPower law exponent |
| spellingShingle | Kwangwon Ahn Linxiao Cong Hanwool Jang Daniel Sungyeon Kim Business cycle and herding behavior in stock returns: theory and evidence Financial Innovation Herd behavior Business cycle Economic uncertainty Quantum model Power law exponent |
| title | Business cycle and herding behavior in stock returns: theory and evidence |
| title_full | Business cycle and herding behavior in stock returns: theory and evidence |
| title_fullStr | Business cycle and herding behavior in stock returns: theory and evidence |
| title_full_unstemmed | Business cycle and herding behavior in stock returns: theory and evidence |
| title_short | Business cycle and herding behavior in stock returns: theory and evidence |
| title_sort | business cycle and herding behavior in stock returns theory and evidence |
| topic | Herd behavior Business cycle Economic uncertainty Quantum model Power law exponent |
| url | https://doi.org/10.1186/s40854-023-00540-z |
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