Market efficiency and herding: A cross-country analysis

Abstract

In this thesis we examine whether or not herd behavior, the act of market participants to ignore their own beliefs and instead follow the market consensus, is present in four different stock markets. To be able to establish if herd behavior is present, a measure based upon cross-sectional deviation are employed to a set of data covering stock markets returns. Furthermore, we decide to divide these four stock markets into a group of two emerging markets and compare the empirical results against two developed markets. We find significant evidence of herd behavior in the emerging stock markets. In addition, our results indicate that herd behavior is more profound when prices are decreasing than increasing. As a consequence of our results, investors need a larger set of stock to achieve the same level of diversification in markets with herd behavior.