Impact of Global Shocks and Volatility on Herd Behavior in an Emerging Market: Evidence from Borsa Istanbul

34 Pages Posted: 7 Nov 2013 Last revised: 28 Apr 2015

See all articles by Mehmet Balcilar

Mehmet Balcilar

University of New Haven

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Date Written: November 5, 2013

Abstract

This paper contributes to the literature on the financial integration in international stock markets by examining the dynamic relationship between global factors and herd behavior in an emerging market. Utilizing a time-varying transition probability Markov Switching model (TVTP-MS), we examine the role of global risk factors on investor behavior in Borsa Istanbul, dominated largely by foreign investors who hold a substantial share of the stocks traded in this market. Our tests yield three distinct market regimes - low, high, and extreme volatility - and evidence consistent with herd behavior during both the high and extreme volatility regimes. U.S. market related factors are found to dominate regime transitions and thus significantly contribute to herd behavior in all market sectors with the exception of industrials, suggesting that industrials are relatively immune from global shocks. Multivariate synchronization tests further suggest that herding regimes are perfectly synchronized across all market sectors, implying that none of the sectors can serve as a leading indicator for switching to (or from) the herding regimes.

Keywords: Herd behavior, Emerging markets, Markov-switching, Time-varying probabilities, Multivariate synchronization

JEL Classification: C32, G11, G15

Suggested Citation

Balcilar, Mehmet and Demirer, Riza, Impact of Global Shocks and Volatility on Herd Behavior in an Emerging Market: Evidence from Borsa Istanbul (November 5, 2013). Emerging Markets Finance and Trade, Vol. 51, 2015, Available at SSRN: https://ssrn.com/abstract=2350457 or http://dx.doi.org/10.2139/ssrn.2350457

Mehmet Balcilar

University of New Haven ( email )

300 Boston Post Road
West Haven, CT 06516
United States

HOME PAGE: http://www.mbalcilar.net

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3145
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

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