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Herding states and stock market returns

Author

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  • Costa, Filipe
  • Fortuna, Natércia
  • Lobão, Júlio

Abstract

This paper investigates whether herd behaviour states (intense/adverse) affect stock market returns using a fixed effects model to capture cross-sectional and time variability covering the European region. We show that stock market returns depend on past herding states. From December 1992 to December 2020, the mean returns following an intense herding state are 0.26% lower per month over a six-month holding period than following an adverse herding state. Our results are robust to using risk-adjusted returns and a continuous herding variable. We also show that intense herding emerges during periods of lower returns and higher volatility than adverse herding.

Suggested Citation

  • Costa, Filipe & Fortuna, Natércia & Lobão, Júlio, 2024. "Herding states and stock market returns," Research in International Business and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:riibaf:v:68:y:2024:i:c:s0275531923002891
    DOI: 10.1016/j.ribaf.2023.102163
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    More about this item

    Keywords

    Herding behaviour; Cross-sectional dispersion of stock returns; European equity markets; State–space models;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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