Impact of Global Shocks and Volatility on Herd Behavior in an Emerging Market : Evidence from Borsa Istanbul

This paper contributes to the literature on the financial integration in international stock markets by examining the dynamic relationship between global factors and herd behavior in an emerging market. Utilizing a time-varying transition probability Markov Switching model (TVTP-MS), we examine the role of global risk factors on investor behavior in Borsa Istanbul, dominated largely by foreign investors who hold a substantial share of the stocks traded in this market. Our tests yield three distinct market regimes - low, high, and extreme volatility - and evidence consistent with herd behavior during both the high and extreme volatility regimes. U.S. market related factors are found to dominate regime transitions and thus significantly contribute to herd behavior in all market sectors with the exception of industrials, suggesting that industrials are relatively immune from global shocks. Multivariate synchronization tests further suggest that herding regimes are perfectly synchronized across all market sectors, implying that none of the sectors can serve as a leading indicator for switching to (or from) the herding regimes