Did Investor Sentiment and Herding Behavior in the MENA Region Change During Covid-19?

With the global spread of the COVID-19 pandemic, financial markets have experienced instability and high volatility due to increased uncertainty, which, in turn, has led investors to become pessimistic about decisions to buy/sell stocks in the market. Therefore, these pessimistic investors – who are generally the less informed in the market – decide to follow others due to their belief that they are more informed, especially during down market periods. Consequently, a natural question arises: can we confirm that herding behavior during the COVID-19 pandemic occurred due to investor pessimism? In this paper, we investigate the impact of COVID-19 on herding behavior in the MENA region. A comparison before and during the COVID-19 pandemic will be conducted due the increased global uncertainty it has caused. As developed in the financial literature devoted to behavioral finance, events and news can change the behavior and beliefs of investors, which can cause price changes and fluctuations in stock markets. This work studies the effect of investor sentiment on herding behavior in the MENA region in the last decade considering the COVID-19 effect. In fact, it was highlighted in many works (such as Mishra et al., 2021) that during periods of crisis, the sentiment of investors is unstable and they aren’t able to make the right decisions when buying and selling stocks. Therefore, they decide to follow others in the market without relying on their own information. New information can have a big effect on investor sentiment, which, in turn, can have a huge impact on their judgments about future decisions. Good news can make investors optimistic about their future decisions, while bad news can make them pessimistic. Based on the methodology used in Chiang et al. (2010) and by employing a quantile regression analysis for data covering the period 3 January 2011 to 15 July 2021, results show some differences in herding behavior in the Egyptian, Jordanian, Moroccan, and Tunisian stock markets. These different findings on countries and investors' sentiment have important empirical implications since the results suggest different situations of herding, especially between North African and Middle Eastern countries. There is a concordance in the sentiment of investors in both these regions toward herding behavior. Therefore, there is a link between herding behavior and investors' sentiment.