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Herding behavior in the European banking sector during the COVID-19 outbreak: The role of short-selling restrictions

Author

Listed:
  • Ibrahim Yagli

    (Nevşehir Hacı Bektaş Veli University)

  • Ozkan Haykir

    (Niğde Ömer Halisdemir University)

  • Emin Huseyin Cetenak

    (Niğde Ömer Halisdemir University)

Abstract

The purpose of the current paper is twofold: (1) to examine the impact of uncertainty induced by COVID-19 pandemic on herding behavior, and (2) to understand whether short-selling restrictions have mitigating role in herding behavior.We employ both cross-sectional market deviation (CSSD) and cross-sectional absolute standard deviation (CSAD) approaches to detect herding in European capital markets. For robustness analysis, we estimate herding behavior under different market dynamics, namely high-low volatility periods and up-down markets. We find no strong evidence regarding herding in prior to pandemic; however, herding behavior is more common in the COVID-19 period, indicating triggering role of uncertainty in herding behavior. The results are robust to the herding models whereas they are sensitive to the asymmetric effects. Regarding the short-selling restrictions, we fail to support the impact of short-selling limitations on herding behavior since there is no difference between restricted and unrestricted periods. The overall results indicate that herding behavior prevails amid the pandemic, confirming that fear and uncertainty induced by COVID-19 causes less-informed investors to follow the actions of others. Investors should consider this inefficiency when investing in capital markets. Besides, short-selling restrictions do not have significant impact on herding, suggesting regulatory authorities should employ other tools rather than short-selling bans.

Suggested Citation

  • Ibrahim Yagli & Ozkan Haykir & Emin Huseyin Cetenak, 2022. "Herding behavior in the European banking sector during the COVID-19 outbreak: The role of short-selling restrictions," Economics Bulletin, AccessEcon, vol. 42(3), pages 1486-1497.
    • Handle: RePEc:ebl:ecbull:eb-21-01112
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    References listed on IDEAS

    as
    1. Noemi Schmitt & Frank Westerhoff, 2017. "Herding behaviour and volatility clustering in financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 17(8), pages 1187-1203, August.
    2. Yao, Juan & Ma, Chuanchan & He, William Peng, 2014. "Investor herding behaviour of Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 12-29.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    COVID-19; Herding behavior; Short-selling restrictions; European stock market; Banking sector;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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