Is herding behaviour present on the financial markets? Evidence from the US and European markets.

Abstract

Herd behaviour is a cognitive bias that has many alternative definitions, we have chosen the following asthe most relevant and broadest in our opinion: the tendency to imitate the actions of others. This behaviourcan be seen as rational or irrational. We use two methods to analyse the potential herding behaviour on thefinancial market. We have chosen the US market and the European market and the result of our analysis is thatthere is no evidence of herd behaviour using the methods we have selected over the period 1 January 2006 to31 December 2020. The results are in line with previous work done on this subject. We decided to analysethis behaviour because if there is evidence of herding it is challenging the rationality of agents on the financialmarket. Therefore it could question the relevance of modern financial theories by for example impacting thebenefits of portfolio diversification. It can also be a cause for bubbles and crisis. According to our work boththe European and the US market seems to be efficient, at least in terms of the herding behaviour. Neverthelesswe also pointed out that the methods used were possibly not the best suited to detect this kind of psychologicalbehaviour and where focusing on the local herding behaviour and do not have an international perspective.From our result we also noticed that as the empirical evidence suggested, the metric used to detect herding aremore important during the down market and less present for larger companies. We conclude that if there isherding on the market, it has a limited impact on the European and US markets and do not affect the rationalityof the agents who are acting on these markets.