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International Business Research

Vol. 4, No. 3; July 2011

Herd Behavior and Market Stress: The Case of Four European Countries
Haroon Khan (Corresponding Author)
CERGAM, Institute d’Administration des Entreprises d’Aix-en-Provence (IAE)
Aix en Provence cedex 2, France
Tel: 33-(0)6-7385-1112
E-mail: haroon.khan@iae-aix.com
Slim A. Hassairi
IMPGT, Aix en Provence
Jean-Laurent VIVIANI
CREM, Université de Rennes 1, Rennes, France
Received: January 10, 2011

Accepted: January 27, 2011

doi:10.5539/ibr.v4n3p53

Abstract

Despite the number of studies that have been carried out on the stock markets, quite a rare have in particular
analyzed the tendency of herd behavior of countries in the European Union. Therefore, the emphasis is traditionally
put on Asian countries and the United States. The detection of the herding phenomena is particularly made with
subjective or extrapolative techniques. Consequently, our study is relevant on two levels since that, on one hand, it
focuses on European countries and, on the other hand, it aims to verify the existence or non existence of the herding
phenomena according to the method elaborated by (Hwang, S; Salmon, M (2000, 2004,2008).
Keywords: International capital markets, Herd behavior, Equity return dispersion, International finance
Classification JEL: G15, G31
1. Introduction
This study is focused on Herd behaviour and market stress using the models of, and that of. The data was collected
from four European countries namely France, UK, Germany and Italy. It has been found that these countries’ capital
and securities market follow the herd behaviour in the events of crisis.
In the literature of behavioral finance, herd behaviour is often used to describe the correlation in the trades resulting
from interactions between investors. This behavior is considered to be rational for less sophisticated investors, who
try to imitate financial gurus or monitor the activities of successful investors, since the use of their own information
and knowledge lead to greater cost. Villatoro (2009) investigates the association between financial intermediaries’
(FI) reputation and herding and argued that financial intermediaries with high reputation are prone to invest in
information, whereas those with poor reputation will tend to imitate other financial intermediaries’ portfolio
decisions. The consequence of this behavior is herd behaviour, Nofsinger and Sias as (1999) notes,''a negotiating
group of investors in the sa...
www.ccsenet.org/ibr International Business Research Vol. 4, No. 3; July 2011
Published by Canadian Center of Science and Education
53
Herd Behavior and Market Stress: The Case of Four European Countries
Haroon Khan (Corresponding Author)
CERGAM, Institute d’Administration des Entreprises d’Aix-en-Provence (IAE)
Aix en Provence cedex 2, France
Tel: 33-(0)6-7385-1112 E-mail: haroon.khan@iae-aix.com
Slim A. Hassairi
IMPGT, Aix en Provence
Jean-Laurent VIVIANI
CREM, Université de Rennes 1, Rennes, France
Received: January 10, 2011 Accepted: January 27, 2011 doi:10.5539/ibr.v4n3p53
Abstract
Despite the number of studies that have been carried out on the stock markets, quite a rare have in particular
analyzed the tendency of herd behavior of countries in the European Union. Therefore, the emphasis is traditionally
put on Asian countries and the United States. The detection of the herding phenomena is particularly made with
subjective or extrapolative techniques. Consequently, our study is relevant on two levels since that, on one hand, it
focuses on European countries and, on the other hand, it aims to verify the existence or non existence of the herding
phenomena according to the method elaborated by (Hwang, S; Salmon, M (2000, 2004,2008).
Keywords: International capital markets, Herd behavior, Equity return dispersion, International finance
Classification JEL: G15, G31
1. Introduction
This study is focused on Herd behaviour and market stress using the models of, and that of. The data was collected
from four European countries namely France, UK, Germany and Italy. It has been found that these countries’ capital
and securities market follow the herd behaviour in the events of crisis.
In the literature of behavioral finance, herd behaviour is often used to describe the correlation in the trades resulting
from interactions between investors. This behavior is considered to be rational for less sophisticated investors, who
try to imitate financial gurus or monitor the activities of successful investors, since the use of their own information
and knowledge lead to greater cost. Villatoro (2009) investigates the association between financial intermediaries’
(FI) reputation and herding and argued that financial intermediaries with high reputation are prone to invest in
information, whereas those with poor reputation will tend to imitate other financial intermediaries’ portfolio
decisions. The consequence of this behavior is herd behaviour, Nofsinger and Sias as (1999) notes,''a negotiating
group of investors in the same direction over a period of time. "Empirically, this can lead to observed behaviors that
are correlated between individuals and causing systematically erroneous decision making by entire populations
(Bikhchandani et al., 1992).
As for us, we retain the notion of herd behaviour as (Bikhchandani and Sharma 2000) for which "an individual is
said to herd, if, without knowing the decisions of other investors, would have made the investment, but not
undertake when it finds that other investors have decided not to undertake the investment. We therefore speak of
herd behavior analysts and investors when they decide to ignore their own information and follow signs for
observed decisions of other analysts and investors."
Other authors such as (Grinblatt, Titman and Wermers 1995), and (Nofsinger and Sias 1999) propose a broader
definition of herd behaviour, as "having a group of investors transacting in the same way, in a same direction (buy
or sell) for a given period of time. However, the correlation in investor behavior does to the extent that they
influence each other. This correlation may be observed if investors are independently influenced by factors and / or
common information. "
(Hirshleifer, D Teoh, SH 2003) distinguish between two types of behavior, "and they mean by" herd behaviour
"(herd behavior) the convergence of behaviors and" informational cascades "situations where the individual's
chosen action based on the observation of others regardless of his own informational signal. Thus, to achieve the
same degree of diversification, investors need a larger selection of titles that are a lower degree of correlation. In
addition, if market participants tend to flock the market consensus, the market behavior of investors may cause asset
prices to deviate from economic fundamentals. Consequently, assets are not fairly priced. A number of studies have
paid attention to market participants’ herding behavior, ranging from mutual fund managers to institutional analysts.
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