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Dynamic herding analysis in a frontier market

Author

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  • Arjoon, Vaalmikki
  • Bhatnagar, Chandra Shekhar
Abstract
We use constant coefficient and time-varying parameter approaches to examine herding in the context of a frontier market. Our sample comprises of all companies listed on the Trinidad and Tobago Stock Exchange from January 2001 to December 2014. We find significant evidence of herding across the market, which is more prominent for smaller stocks. Microstructures, including liquidity and volatility, intensify herd behavior, except for larger firms. Additional analyses show that herding is present in both up and down markets, but is stronger during rising markets. The time-varying analysis, based on a state-space Kalman filter, further establishes that herding, though quite prevalent, is not a static feature of the market but evolves throughout the sample period. Specifically, it oscillates between greater herding to anti-herd behavior, as investors identify themselves with crises and better information access respectively.

Suggested Citation

  • Arjoon, Vaalmikki & Bhatnagar, Chandra Shekhar, 2017. "Dynamic herding analysis in a frontier market," Research in International Business and Finance, Elsevier, vol. 42(C), pages 496-508.
    • Handle: RePEc:eee:riibaf:v:42:y:2017:i:c:p:496-508
    DOI: 10.1016/j.ribaf.2017.01.006
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    2. Siniša Bogdan & Natali Suštar & Bojana Olgić Draženović, 2022. "Herding Behavior in Developed, Emerging, and Frontier European Stock Markets during COVID-19 Pandemic," JRFM, MDPI, vol. 15(9), pages 1-12, September.
    3. Alexakis, Christos & Chantziaras, Antonios & Economou, Fotini & Eleftheriou, Konstantinos & Grose, Christos, 2023. "Animal Behavior in Capital markets: Herding formation dynamics, trading volume, and the role of COVID-19 pandemic," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    4. Puput Tri Komalasari & Marwan Asri & Bernardinus M. Purwanto & Bowo Setiyono, 2022. "Herding behaviour in the capital market: What do we know and what is next?," Management Review Quarterly, Springer, vol. 72(3), pages 745-787, September.
    5. Azra Zaimovic & Adna Omanovic & Almira Arnaut-Berilo, 2021. "How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature," JRFM, MDPI, vol. 14(11), pages 1-30, November.
    6. Wang, Xinru & Kim, Maria H. & Suardi, Sandy, 2022. "Herding and China's market-wide circuit breaker," Journal of Banking & Finance, Elsevier, vol. 141(C).
    7. Kallinterakis, Vasileios & Wang, Ying, 2019. "Do investors herd in cryptocurrencies – and why?," Research in International Business and Finance, Elsevier, vol. 50(C), pages 240-245.
    8. Stavroyiannis, Stavros & Babalos, Vassilios, 2019. "Herding behavior in cryptocurrencies revisited: Novel evidence from a TVP model," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 57-63.
    9. Gimeno, Ruth & Andreu, Laura & Sarto, José Luis, 2022. "Fund trading divergence and performance contribution," International Review of Financial Analysis, Elsevier, vol. 83(C).
    10. Mouna Youssef & Khaled Mokni, 2023. "Herding behavior in stock markets of oil-importing and oil-exporting countries: the role of oil price," Journal of Asset Management, Palgrave Macmillan, vol. 24(1), pages 44-58, February.
    11. Charles Shaw, 2022. "Portfolio Diversification Revisited," Papers 2204.13398, arXiv.org.
    12. Youssef, Mouna & Mokni, Khaled, 2018. "On the effect of herding behavior on dependence structure between stock markets: Evidence from GCC countries," Journal of Behavioral and Experimental Finance, Elsevier, vol. 20(C), pages 52-63.
    13. Arjoon, Vaalmikki & Bhatnagar, Chandra Shekhar & Ramlakhan, Prakash, 2020. "Herding in the Singapore stock Exchange," Journal of Economics and Business, Elsevier, vol. 109(C).
    14. Costa, Filipe & Fortuna, Natércia & Lobão, Júlio, 2024. "Herding states and stock market returns," Research in International Business and Finance, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Herding; Frontier markets; Market microstructures; Time-varying herding; Kalman filter;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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