On the time varying nature of herding behaviour: evidence from major European indices

The recent financial crisis clearly demonstrated that herding behaviour incorporates an unhedgeable systemic risk, exposing investors and financial institutions to market prices and valuations, which cannot be solely explained by fundamentals. We examine the existence of herding behaviour of major European stock market indices employing daily data during a recent period from 15 April 2005 to 31 December 2012. Following the recent events that unfolded in the Eurozone sovereign debt crisis our analysis is further expanded on two subsamples namely north and south European countries. Since the observation of significant herding patterns is very sensitive not only to the selected indices universe, but also to the time frame under consideration, a novel approach of this work is to explore the dynamics of the system with the use of time rolling window of varying size. A snick review of our results indicates significant herding behaviour for the countries under examination. Finally, we test whether herding effects became more intense during the recent financial crisis as a function of the conducted rolling window size.