An empirical investigation of herding behavior in emerging stock markets: A structural break approach for BRIC countries and Turkey

Behavioural finance is an emerging field that has shown the remarkable growth in last two decades as it emerges as a reaction to the concept of efficient market hypothesis. This field deals with the effects of investor psychology on decision making and provides an insight of stock market anomalies. Herding Behaviour is one of such anomalies that is defined as tendency for investors to follow their peer's decisions or the market trend. This research study proposes a dynamic herding approach which takes into account herding under different market regimes. We consider BRIC, Turkish and USA stock markets and apply Bai-Perron switching regression. For this reason we use daily data of individual stocks and Indices ranging from 1st of January 2006 to 30th of May 2017. Our findings of static model show the evidence of herding only in SSE (China). Similarly switching regression finds herding evidence during crises regimes of SSE (China) and S&P 500 (US). The alternative approach of Markov regime switching also supports these findings. We also report that degree of asymmetry varies across the regions for all the markets and there is an evidence of asymmetry in linear terms for all the markets except BSE-NIFTY 500 (India). For herding and volatility contagion we find strong evidence of spill-over from US to all the markets except India when used static model. On the other hand switching regression approach (Bai-Perron) reveals that there is a spill-over of herding and volatility from US to Brazil, Russia and China. Furthermore Markov regime switching approach complements our findings. Key words: Behavioural Finance, Herding Behaviour, Cross Sectional Dispersions, Structural Breaks.