Cross Sectional Absolute Deviation of Security Return: Evidence from European Equity Markets
DOI:
https://doi.org/10.61143/umyu-jafr.2(2)2021.008Keywords:
Herding, Financial Regulation, Equity MarketsAbstract
This paper tries to investigate whether changes in information environment resulting from the changes in the EU financial market regulations mitigates investors’ herding practice in the equity market. To achieve this set objective, the paper employs and modifies one of the most reliable and widely used herding detection techniques of Cross-Sectional Absolute Deviation (CSAD) which uses stock return dispersion as a function of aggregate market return as a proxy for herding behavior. The rationale behind these herding measures is that limited deviation of returns around their cross-sectional average implies that investors ignore their prior heterogeneous information and follow the market consensus in their trading patterns. The findings of this study reveal significant evidence of investors’ herding practice following the EU financial regulatory changes. These findings tend to defy the notion that strengthening financial regulations has the potential to enhance the informational efficiency of capital markets by encouraging information-based trading and mitigating irrational investment behaviors like intentional herding. The results of this study are expected to be of interest to academics, regulators, and policy-makers, and to the investing public and other market participants who trade based on firm fundamental variables. Moreover, the findings can be used to serve as a reminder to regulators in other jurisdictions to ensure that their countries are maintaining a clean and healthy financial markets regulatory infrastructure.
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