Investor herds and regime-switching: Evidence from Gulf Arab stock markets

Abstract

This paper proposes a dynamic herding approach which takes into account herding under different market regimes, with concentration on the Gulf Arab stock markets - Abu Dhabi, Dubai, Kuwait, Qatar and Saudi Arabia. Our results support the presence of three market regimes (low, high and extreme or crash volatility) in those markets with the transition order low, crash and high volatility', suggesting that these frontier markets have a different structure than developed markets. The results also yield evidence of herding behavior under the crash regime for all of the markets except Qatar which herds under the high volatility regime. The findings of the cross-GCC herding model also demonstrate herding comovements and not spillovers and are also robust to the cross-GCC volatility shocks. The tests that underline the cross-volatility shocks suggest that the crash regime is a true regime and not a statistical artifact. Policy and portfolio diversification implications are discussed. (C) 2012 Elsevier B.V. All rights reserved.