Herding dynamics in exchange groups: Evidence from Euronext

Abstract

 We examine whether joining an exchange group confers an effect over herding in the group's member-markets and if this effect persists when accounting for various domestic and international market states, the dynamics of the group's member-markets and the outbreak of financial crises  We test for the above in the context of the Euronext, which contains four equity markets (Belgium, France, the Netherlands and Portugal)  Herding is significant post-merger in all four markets; herding in Portugal is significant (yet less strong) pre-merger as well. These results are robust when controlling for various domestic/international market states and the dynamics of the group's markets  Herding following the outbreak of the euro-zone crisis is significant in Belgium, the Netherlands and Portugal, and is motivated by the dynamics of the group's two largest markets (France and the Netherlands). *Highlights (for review)Page 2 of 33 A c c e p t e d M a n u s c r i p t Herding Dynamics in Exchange Groups: Evidence from Euronext AbstractThis study investigates in the context of the Euronext, whether joining an exchange group affects herding in the group"s member-markets and if this effect persists when accounting for various domestic and international market states, the dynamics of the group"s member-markets and the outbreak of financial crises. We find that herding is significant post-merger in all four constituent equity markets (Belgium, France, the Netherlands and Portugal) of the Euronext, with herding in Portugal being significant (yet less strong) pre-merger as well. These results are robust when controlling for various domestic and international market states, as well as the dynamics of the group"s markets. The period following the outbreak of the euro-zone sovereign debt crisis produces significant herding in Belgium, the Netherlands and Portugal, with this herding being motivated by the dynamics of the group"s two largest markets (France and the Netherlands).JEL classification: G12, G15, G31

Intraday herding on a cross-border exchange

“…It is also possible that intraday strategies generate correlated trades themselves, due to them either being programmed to focus on similar signals (those based on computer algorithms; see Sornette and von der Becke, 2011;Chaboud et al, 2014) or based on similar technical trading rules (the case of day trading). Also, as mentioned previously, earlier event studies (Andrikopoulos et al, 2014;Economou et al, 2015) 15 have demonstrated that joining 15 Andrikopoulos et al, (2014) and Economou et al, (2015) compare herding in Euronext's four constituent equity markets prior to and after their merger into the group. Andrikopoulos et al, (2014) measure herding at the monthly frequency for the January 1993 -October 2009 period and show that herding in Belgium, France and the Netherlands is significant (insignificant) following (before) these markets' merger into the Euronext; no evidence of herding significance was detected for Portugal, be it before or after its entry into the group.…”

“…Andrikopoulos et al, (2014) measure herding at the monthly frequency for the January 1993 -October 2009 period and show that herding in Belgium, France and the Netherlands is significant (insignificant) following (before) these markets' merger into the Euronext; no evidence of herding significance was detected for Portugal, be it before or after its entry into the group. Economou et al, (2015) measure herding at the daily frequency for the January 1990 -December 2012 period and show that herding in Belgium, France and the Netherlands is significant (insignificant) following (before) these markets' merger into the Euronext; evidence of herding significance was detected for Portugal both before and after its entry into the group. Aside from examining herding at intraday frequencies (compared to the monthly and daily ones of these studies) our work differs from the above studies, since, instead of investigating the effect of Euronext-membership over herding in each of these four markets individually, it investigates a cross-border exchange group (more specifically, the Euronext) has led herding to grow in significance in the group's member markets.…”

“…spanning across their member markets), thus suggesting the possibility of these dynamics leading to intraday herding at that level. On the other hand, recent evidence (Andrikopoulos et al, 2014;Economou et al, 2015) has denoted that merging into a cross-border exchange group leads to an increase in a market's herding. Although these studies examine herding at lower frequencies (monthly and daily, respectively), the fact that joining a cross-border group constitutes an event capable of fostering herding in a market raises the question as to whether herding at the group level is also significant and what features it might entail.…”

“…whether intraday herding within a cross-border group varies in its significance across its member markets) and whether this effect is robust when controlling for the trading dynamics of the group's other markets. Thirdly, we assess the effect of the 2007-09 global financial crisis, in view of evidence (Choe et al, 1999;Kim and Wei, 2002;Hwang and Salmon, 2004;Chiang and Zheng, 2010;Mobarek et al, 2014;Economou et al, 2015) suggesting that crisis episodes constitute turning points in herding.…”

Herding behaviour in a peripheral European stock market: the impact of the subprime and the European sovereign debt crises

“…This work is interesting because it compares different models. They not only presented the two methodologies based on individual returns of assets, CSSD and CSAD, but also the methodology of Hwang and Salmon (2004) The study of crises periods is important because there is no agreement on the effect of crises on herding behavior (Economou et al, 2015). For instance, according to Kim and Wei (2002), in the Asian crisis of 1997, foreign investors were feedback traders (buying when the market rises and selling when the market falls), systematically ignoring the fundamentals.…”