Time Varying Herding in European Financial and Banking Stocks: 2001-2011

Abstract

Herding relates to behaviour by investors that involves mimicking the public actions and decisions of others rather than following privately held views and information. Herding is widely believed to be an important behavioural feature of financial markets, particularly in times of crisis, but the empirical evidence from previous studies is inconclusive and sometimes contradictory. This study employs the Hwang and Salmon (2004) beta herding model to examine herding in the markets for European financial and banking stocks. Clear evidence is found for the presence and persistence of herding in both markets however the degree of herding in both markets is low, particularly in the market for bank stocks. Time-varying changes in the extent of herding in both markets has been found, and this is persistent independently from and given market conditions and macro factors. The evolution of herding is similar, but not identical, to that found by Hwang and Salmon (2004) for US and South Korean stocks, Keyi (2010) for Irish and Finnish stocks and Economou et al. (2011) for Greek and Spanish stocks: Whilst herding does increase prior to the 2007 global financial crisis, and herding is found both in bull and bear markets, herding does not decrease before the crisis breaks. This is possibly due to the specific impacts of the 2007 crisis on financial institutions, reducing the scope for investors to revert to fundamentals when pricing European financial and bank stocks (thus prolonging herding).