The Effect of Liquidity on Herding: A Comparative Study

37 Pages Posted: 23 Jan 2016

See all articles by Emilios C. Galariotis

Emilios C. Galariotis

School of Production Engineering and Management

Styliani Iris Krokida

Athens University of Economics and Business - Department of Accounting and Finance

Spyros I. Spyrou

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: January 22, 2016

Abstract

This paper provides original evidence on the relation between herd behavior and equity market liquidity, an issue that has been neglected when studying herd behavior towards the consensus. We use equity price data for the G5 markets, and initially we find no evidence of herding. When, however, we condition on the daily liquidity of stocks we find significant evidence of herd behavior for days with high or medium stock liquidity, for all countries and the majority of the sub-periods. The only exception is Germany for which there is very weak evidence of herding. Variance decomposition tests indicate that the variance of the average equity market liquidity is affected by return clustering, especially during the crisis and post-crisis period and this effect is more pronounced for the US market.

Keywords: Herding, Liquidity, Financial Crisis, Major Equity Markets

JEL Classification: G02, G14, G15

Suggested Citation

Galariotis, Emilios C. and Krokida, Styliani-Iris and Spyrou, Spyros I., The Effect of Liquidity on Herding: A Comparative Study (January 22, 2016). Available at SSRN: https://ssrn.com/abstract=2720152 or http://dx.doi.org/10.2139/ssrn.2720152

Emilios C. Galariotis

School of Production Engineering and Management ( email )

Technical Uiversity of Crete, Fin. Eng. Laboratory
University Campus
Chania, 73100
Greece
00302821037239 (Phone)

HOME PAGE: http://https://www.fel.tuc.gr

Styliani-Iris Krokida

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Spyros I. Spyrou (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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