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This paper examines the impact of bank diversification on stability, using bank‐level data for 22 Asian countries over the period from 1995 to 2009. We empirically investigate whether country characteristics, economic structure, regulatory and governance environments, and globalization have affected the degree of banking stability in Asia. This study takes on two measures for banking diversification ‐ asset and income diversities ‐ and adopts a broad set of variables as a proxy for bank stability. We apply dynamic panel data techniques and show different results from the U.S. and Europe. Our results first reveal that in Asia asset diversity is not sufficient enough to improve bank stability. However, bank stability can be enhanced through a strategy of income diversity. Second, a higher degree of globalization decreases bank stability through income diversity, but stability rises through asset diversity. Third, a country with a higher level of corporate governance reduces the agency problem, thus further increasing stability through diversity. Finally, a country with a higher level of economic development will support asset diversity so that banks can obtain higher profit accompanied by lower risk.

When analysing the behavior of investors, the emphasis is usually on positive feedback and herding behavior, and the existing literature abounds with studies on the domestic strategy of mutual funds or on their impact. Due to the advantages in terms of the data, many studies investigate US data. However, with the increased flows of capital into emerging markets, studying the behavior of international mutual funds in emerging markets has become more and more important. Nevertheless, studies involving emerging markets are relatively rare. This study examines whether the positive feedback effect and herding behavior exist in Asian markets based on mutual fund data covering the period from 1996 to 2004. The long period enables us to test the sensitivities under the following four conditions, namely the capital volatility (volatile vs. stable), the degree of suffering during the Asian crisis (more suffering vs. less suffering), and the timing of the Asian crisis (pre-, during, and post-crisis), using the exchange rate regime. It was found in this study that mutual fund inflows into the Asian market were attracted by positive stock returns and currency appreciation. Furthermore, it was found that the positive feedback effect and herding behavior did exist in the Asian markets. However, the extent of the above behavior is not the same under different conditions.Herding, Financial crisis, Mutual fund, Positive feedback effect, Behavioral effect,