Herding Behavior and Systemic Risk in Global Stock Markets

This paper provides new evidence of herding in global equity markets. Using quantile regressions applied to daily data for 33 countries, we investigate herding during the Eurozone crisis, China's market crash in 2015-2016, and in the aftermath of the Brexit vote. We find significant evidence of herding behavior driven by negative tail market conditions for most countries. Analyzing the spillover of herding during these three events, our results show cross-country herding effects from the Eurozone, China and the United Kingdom, with Brexit playing the most significant role in the negative co-movement of world stock exchanges. This study also investigates the relationship between herding and systemic risk, suggesting that herding increases when systemic risk increases. Granger causality tests and Johansen's vector error-correction model provide solid empirical evidence of a strong interrelationship between herding and systemic risk, entailing that herding behavior may be an ex-ante aspect of systemic risk