Chapter 4 - Herd Behavior in Frontier Markets: Evidence from Nigeria and Morocco

Abstract

Herd behavior has attracted research interest during the last decades due to its important implications for stock market efficiency and portfolio diversification. However, herding has not been widely studied in the context of frontier markets. In this chapter we examine herd behavior in two African frontier markets, namely Nigeria and Morocco, employing the cross-sectional dispersion approach of Chang et al. (Chang, E.C., Cheng, J.W., Khorana, A., 2000. An examination of herd behavior in equity markets: an international perspective. J. Bank. Financ. 24, 1651–1679), also testing for asymmetries in herd behavior under different market states and the impact of the US stock market. Even though there is no evidence of herding employing the benchmark model for the whole sample period, there is evidence of herding during down market volatility days for Nigeria. Moreover, there is evidence of herding in Morocco during the global financial crisis. Testing for structural breaks reveals significant herding in Morocco for the subperiod from Dec. 2005 to Dec. 2014 with asymmetric effects. Finally, there is herding toward the US market in Nigeria.