COVID-19 Pandemic and Investor Herding in International Stock Markets
The aim of this study is to understand the effect of the recent novel coronavirus pandemic on investor herding behavior in global stock markets. Utilizing a daily newspaper-based index of financial uncertainty associated with infectious diseases, we examine the association between pandemic-induced m...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2021-09-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/9/9/168 |
| _version_ | 1797517253276598272 |
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| author | Elie Bouri Riza Demirer Rangan Gupta Jacobus Nel |
| author_facet | Elie Bouri Riza Demirer Rangan Gupta Jacobus Nel |
| author_sort | Elie Bouri |
| collection | DOAJ |
| description | The aim of this study is to understand the effect of the recent novel coronavirus pandemic on investor herding behavior in global stock markets. Utilizing a daily newspaper-based index of financial uncertainty associated with infectious diseases, we examine the association between pandemic-induced market uncertainty and herding behavior in a set of 49 global stock markets. More specifically, we study the pattern of cross-sectional market behavior and examine whether the pandemic-induced uncertainty drives directional similarity across the global stock markets that cannot be explained by the standard asset pricing models. Utilizing a time-varying variation of the static herding model, we first identify periods during which herding is detected. We then employ probit models to examine the possible association between pandemic-induced uncertainty and the formation of herding. Our findings show a strong association between herd formation in stock markets and COVID-19 induced market uncertainty. The herding effect of COVID-19 induced market uncertainty is particularly strong for emerging stock markets as well as European PIIGS stock markets that include some of the hardest hit economies in Europe by the pandemic. The findings establish a direct link between the recent pandemic and herd formation among market participants in global financial markets. Considering the evidence that herding behavior can drive security prices away from equilibrium values supported by fundamentals and further contribute to price fluctuations in financial markets, our findings have significant implications for policy makers and investors in their efforts to monitor investor sentiment and mitigate mis-valuations that might occur as a result. Furthermore, the evidence on the behavioral pattern of stock investors in relation to infectious diseases uncertainty can be useful in studying price discovery in stock markets and might help market participants in forming hedging strategies to mitigate downside risk in their investment portfolios. |
| first_indexed | 2024-03-10T07:14:08Z |
| format | Article |
| id | doaj.art-22a9e156e67c411b91949c1c518ce914 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-10T07:14:08Z |
| publishDate | 2021-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-22a9e156e67c411b91949c1c518ce9142023-11-22T15:09:00ZengMDPI AGRisks2227-90912021-09-019916810.3390/risks9090168COVID-19 Pandemic and Investor Herding in International Stock MarketsElie Bouri0Riza Demirer1Rangan Gupta2Jacobus Nel3School of Business, Lebanese American University, Jbeil P.O. Box 36, LebanonDepartment of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026, USADepartment of Economics, University of Pretoria, Pretoria 0002, South AfricaDepartment of Economics, University of Pretoria, Pretoria 0002, South AfricaThe aim of this study is to understand the effect of the recent novel coronavirus pandemic on investor herding behavior in global stock markets. Utilizing a daily newspaper-based index of financial uncertainty associated with infectious diseases, we examine the association between pandemic-induced market uncertainty and herding behavior in a set of 49 global stock markets. More specifically, we study the pattern of cross-sectional market behavior and examine whether the pandemic-induced uncertainty drives directional similarity across the global stock markets that cannot be explained by the standard asset pricing models. Utilizing a time-varying variation of the static herding model, we first identify periods during which herding is detected. We then employ probit models to examine the possible association between pandemic-induced uncertainty and the formation of herding. Our findings show a strong association between herd formation in stock markets and COVID-19 induced market uncertainty. The herding effect of COVID-19 induced market uncertainty is particularly strong for emerging stock markets as well as European PIIGS stock markets that include some of the hardest hit economies in Europe by the pandemic. The findings establish a direct link between the recent pandemic and herd formation among market participants in global financial markets. Considering the evidence that herding behavior can drive security prices away from equilibrium values supported by fundamentals and further contribute to price fluctuations in financial markets, our findings have significant implications for policy makers and investors in their efforts to monitor investor sentiment and mitigate mis-valuations that might occur as a result. Furthermore, the evidence on the behavioral pattern of stock investors in relation to infectious diseases uncertainty can be useful in studying price discovery in stock markets and might help market participants in forming hedging strategies to mitigate downside risk in their investment portfolios.https://www.mdpi.com/2227-9091/9/9/168COVID-19international stock marketsinvestor herding |
| spellingShingle | Elie Bouri Riza Demirer Rangan Gupta Jacobus Nel COVID-19 Pandemic and Investor Herding in International Stock Markets Risks COVID-19 international stock markets investor herding |
| title | COVID-19 Pandemic and Investor Herding in International Stock Markets |
| title_full | COVID-19 Pandemic and Investor Herding in International Stock Markets |
| title_fullStr | COVID-19 Pandemic and Investor Herding in International Stock Markets |
| title_full_unstemmed | COVID-19 Pandemic and Investor Herding in International Stock Markets |
| title_short | COVID-19 Pandemic and Investor Herding in International Stock Markets |
| title_sort | covid 19 pandemic and investor herding in international stock markets |
| topic | COVID-19 international stock markets investor herding |
| url | https://www.mdpi.com/2227-9091/9/9/168 |
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