Herding behavior in integrated financial markets: the case of MILA

Purpose - It has been argued in the literature that structural changes in the financial markets, such as integration, have the potential to cause herding behavior or correlated behavioral patterns in traders. The purpose of this study is to investigate whether there is any financial herding behavior in the Latin American Integrated Market (MILA), a transnational stock market composed of Chile, Peru, Colombia and Mexico stock exchanges and whether there is any ARCH or GARCH effect in the herding behavior models. Design/methodology/approach - This study uses the modified return dispersion approach on daily index return data. The sample period is from January 03, 2002 to May 07, 2019. The data are obtained from the MILA database. To count time-varying volatilities in herding models, the authors run ARCH family regression with GARCH (1,1) settings. Hwang and Salmon (2004) model is used as a robustness test. Findings - The authors found strong herding behavior under the general market conditions and moderate and partial herding behavior under some specified markets circumstances, such as bull and bear markets and high-low volatility states. Moreover, the pre-MILA period exhibits more herding behavior than the post-MILA period. The empirical results show that most of the ARCH and GARCH effects are statistically significant, implying that the past information of stock returns and market volatility significantly affect the volatility of following periods, which can also explain the formation of herding tendency among investors. Finally, the results of the robustness tests (Hwang and Salmon, 2004) confirm herding in all periods, except full sample period for Mexico and post-MILA period for Mexico and Colombia. Research limitations/implications - This study investigates the herding behavior in the MILA market in terms of market return, volatility and timing. A limitation of the paper is that the authors have not included other factors on the formation of herding behavior, such as macroeconomic factors, effects of regional or international markets and policy influences. The authors will explore the issue in the extension of the paper. Practical implications - As MILA is the first virtual integration of stock exchanges without merging, the study provides useful findings and draws good inferences of herding behavior in the MILA market in terms of market return, volatility and timing which are useful for academics, investors and policymakers in their investment and decision makings. Social implications - The paper provides useful findings and draws good inferences of herding behavior in the MILA market in terms of market return, volatility and timing which are not only useful in practical implications, but also in social implications. Originality/value - This study contributes to the herding literature by examining four different hypotheses in respect of the unique case of transnational stock exchange without fusions or corporate mergers, where each market maintains its independence and regulatory autonomy. The authors also contribute to the literature by including both ARCH and GARCH effects in the herding behavioral models along the Hwang and Salmon (2004) approach.