Empirical Investigation of Herding Behavior in East Asian Stock Markets Toward the U.S. Market

This paper examines the shift of dominance of the American stock market. We also observe herding behavior changes of major Asia Pacific regions towards the American market in the wake of major events that affected financial markets. Events examined include the Asian financial crisis, Internet bubble, September 11 attacks, SARS outbreak, and global financial crisis. Evidence shows the American stock market still held the leading position over the East Asian markets in the wake of these major events. We define the continuing bull (and continuing bear) of the American stock market as the dummy variable of herding behavior. We compare the difference in stock returns before and after structural breaks by investigation into the stock markets in Hong Kong, Taiwan, and Japan. Finally, we propose suitable investment strategies related to herding behavior in the East Asian stock markets toward the American stock market. The examination of out-of-sample profitability revealed the proposed investment strategies contributed to significantly positive average portfolio returns, whether in continuing bull or continuing bear markets.