Review of Accounting and Finance

Herd behavior in the French stock market

Houda Litimi,
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The French
Herd behavior in the French stock market
stock market
Houda Litimi
HEC Sousse, LaREMFiQ Laboratry, University of Sousse, Sousse, Tunisia
497
Received 27 November 2016
Abstract Revised 27 February 2017
Purpose – This paper aims to investigate the herding behavior in the French stock market and its effect on Accepted 29 March 2017
the idiosyncratic conditional volatility at a sectoral level.
Design/methodology/approach – This sample covers all the listed companies in the French stock
market, classified by sector, over four major crisis periods. The author modifies the cross-sectional absolute
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deviation (CSAD) model to include trading volume and investors sentiment as herding triggers. Furthermore,
the author uses a modified GARCH model to investigate the effect of herding on conditional volatility.
Findings – Herding is present in the French market during crises, and it is present in only some sectors
during the entire period. The main trigger for investors to embark into a collective herding movement differs
from one sector to another. Furthermore, herding behavior has an inhibiting effect on market conditional
volatility.
Originality/value – The author modifies the CSAD model to investigate the presence of herding in the
French stock market at a sectoral level during turmoil periods. Furthermore, the particularly designed
GARCH model provides new insights on the effect of herding and volume turnover on the conditional
volatility.
Keywords Herding, Conditional volatility, Sectoral analysis
Paper type Research paper

1. Introduction
Until recent years, the dynamics of financial markets remain puzzling and defy the classical
models, although financial researchers invested considerable efforts to understand them.
The literature advances two major theories dealing with dynamic movements in stock
returns. These are the discount rate and the rational bubble theories. The discount rate
assumes that the excess volatility observed in financial markets results from variations in
the discounted dividend rate, and the fluctuation in market prices is the result of the arrival
of new information, which temporarily disturbs the price formation process (Campbell and
Shiller, 1988). The rational bubble theory, on the other hand, describes the unexpected
divergence in a stock price from its intrinsic value. This proposition asserts that sudden
acceleration in stock price movement results only from divulgation of unexpected
information (Zhou and Sornette, 2009; Harras and Sornette, 2011). This information
stimulates the demand for securities, and the excessive demand applies pressure on prices
and fuels the bubble, which can be considered as the deviation of stock prices from market
fundamentals. Hence, when firms do not keep their promises, a bubble can burst and
engender a collapse in the market (Montier, 2007).
However, both discount rate and rational bubble theories have been heavily criticized.
Indeed, Shiller (2007) used the variance-bounds test and showed that the stock price Review of Accounting and
Finance
volatility has largely exceeded its intrinsic value and is greater than the dividend variance Vol. 16 No. 4, 2017
pp. 497-515
© Emerald Publishing Limited
1475-7702
JEL classification – G14, G15 DOI 10.1108/RAF-11-2016-0188
 RAF limit, thus, proving evidence against the discount rate theory. Equally, the rational bubble
16,4 theory lays on a restrictive assumption because it assumes that excessive stock price
fluctuation results only from important news. Nevertheless, quite a lot of dynamic market
movements, such as the 1929 crisis, the 1987 crash or the subprime crisis, did not correlate
with a specific new event.
Recently, the behavioral finance theory advances a convenient and realistic explanation
498 of clustered market volatility because human reactions to the events are more important
than the events themselves (Baruch, 1960, p. 84). Thus, the behavioral perspective of market
anomalies is built on psychological and social rules, where investors are victims of errors
and cognitive biases. Behavioral reasoning assumes that the excessive volatility is derived
from emotion and volatile beliefs, it is a persistent event and exists as long as the investor
expresses erroneous pitfalls.
Herding behavior corresponds to an investor who denies his own information and beliefs
to fall prey into a collective trading behavior, even if the action of the group is not supported
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by relevant information. In this case, investors imitate their informed peers, either because
they themselves have no information or because they think the investors they follow have
more pertinent information than they do. Such comportment can be conveyed from one
investor to another generating an increasing bubble, leading to market destabilization and
generating stock excessive volatility. Thus, the detection of herding itself constitutes an
evidence against the rational theory (Lao and Singh, 2011) and can lead to increased
volatility in concentrated financial markets (Venezia et al., 2011).
Few studies empirically provide a direct link between herding movement and dynamic
conditional volatility in the US stock market (BenSaïda et al., 2015; Litimi et al., 2016;
BenSaïda, 2017) and none of them in the French stock market. While some attempts using
the unconditional volatility are conducted in other markets, such as Blasco et al. (2012) in the
Spanish stock market, Balcilar et al. (2014) in the Gulf Arab stock markets, and Huang et al.
(2015) in the Taiwan equity market. The absence of a rigorous study in the French market
has motivated us to examine more deeply into the various sectors rather than the general
overall market.
My objective is twofold: first, I provide a robust examination of herding in every sector of
the French market and whether it is a prevalent factor in fueling bubbles, and second, I test
whether it leads to market excessive volatility. This is of particular interest to risk
management purposes, e.g. investors trading derivatives would be able to use spot market
herding as a useful input for their trading decisions. My sample includes four major periods:
the stock market downturn of 2002, the global financial crisis of 2008, the European
sovereign debt crisis that erupted in 2010, and the Brexit in mid-2016. The remainder of this
paper is as follows: Section 2 discusses the literature of herd behavior; Section 3 describes
the methodology; Section 4 presents the data and results; finally, Section 5 elaborates some
concluding remarks.

2. Herding and market evolution

In the financial literature, researchers attest that stock prices continue to be abnormally and
largely irregular in recent years (Blasco et al., 2012; Chen, 2013). Lux (1995) proclaims that
neither stationarity, rational bubbles nor rational agent models are realistic or convincing
scenarios for the dynamics of financial markets and clustered volatility. He examines herding
and provides a pattern that mimics the stylized fact of stock returns. Actually, investors in the
presence of asymmetric information and uncertainty, do not pick-up the most plausible stock
with high performance in the long run, yet they choose the stock that is likely to have high
market value in the short run (Allen et al., 2006; Akerlof and Shiller, 2009).
 Shiller (2007) has examined the housing market boom and attributed its origin to The French
behavior contagion among agents. In fact, these agents are too optimistic with the rosy idea stock market
that home prices will eternally increase. These biased beliefs spread through social network
processes to generate social contagion of boom thinking. Therefore, the spread of imitative
behavior leads the agents to abandon their private information and derives their behaviors
to totally ignore the conveyed signal from the financial market. This phenomenon is further
observed in corporate finance among CEO’s, known as reputation phenomena. In fact,
managers keep their potentially unprofitable strategies in conformity with the collective
499
belief rather than to invest based on private information, under the fear to fail and lose their
reputation. As discussed by Hirshleifer and Teoh (2003), when a manager’s decision differs
from a decision made by another manager, observers would infer that both managers have
different signals and they are probably of low quality. Conversely, if both managers make
the same decision, observers conclude that they both are of good quality and that the bad
income occurred by chance.
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The interaction between herding, trading volume and volatility has been reticently
investigated. For example, Tan et al. (2008) find that herding tends to be more pronounced in
bull market owing this behavior to high trading volume and high volatility. Bikhchandani
et al. (1992) find a positive correlation between transaction volume and excessive volatility
when applying a herding model. Thus, excessive trading volume can fuel herding behavior
and enhance abnormal increase in stock prices. These authors show that agents in form of
groups trade massively on some specific stocks, which generates high trading volume and
contributes to increase their corresponding volatilities.
Financial literature dealing with herding behavior around the French market is
abundant. However, the attempts to investigate investors consensus are studied using data
on unsegmented market price indices, i.e. on the whole market deprived from detailed
sectoral analysis. Furthermore, they marginalized the effect on volatility. For example,
Chiang and Zheng (2010) investigated numerous global stock markets and reported the
existence of herding in the French market from 1989 to 2009 using the model of Chang et al.
(2000). Mobarek et al. (2014) studied several European stock markets and found insignificant
results in the French market from 2001 to 2012, also during crises and asymmetric market
conditions. Galariotis et al. (2016) found evidence of herding in the G5 countries, including
France, from 2000 to 2015 only when conditioning on the liquidity of stocks. Andrikopoulos
et al. (2014) studied herding in four European equity markets, including France, and found a
significant grow in herd behavior only following a market’s merger in an exchange group.
Other studies, mainly but not limited to, Blasco and Ferreruela (2008) and Messis and
Zapranis (2014), investigated herding in major stock markets, including France, over
different periods and found evidence of herd behavior. Principally, the French market is
studied as part of a group of countries; hence, lacking a thorough analysis. These opposing
results have pushed us to investigate the French stock market at a sectoral level rather than
the overall market.

3. Methodology
I start by regressing the market average return on the chosen herding measure. Next, I apply
vector autoregressive (VAR) estimation and Granger causality test to identify the relation
that links herding with other major indicators; then, I study herding behavior during
financial crises. Finally, I estimate a modified GARCH (1,1) model to investigate the effect of
trading volume and herding on the conditional volatility of the average stock return for each
sector.
 RAF Chang et al. (2000) suggest the cross-sectional absolute deviation-based herding model
16,4 (cross-sectional absolute deviation – CSAD) inspired from the capital asset pricing model
(CAPM)[1], which is:

1 X Nt
CSADt ¼ jRi;t  Rm;t j
Nt i¼1
500
where Ri,t is the observed stock return of company i at time t; and Rm,t is the equally
weighted average of the available sector Nt portfolio returns at time t in the aggregate
market stock; it is computed for each sector by including only sector specific stocks. I choose
the equally weighted-average of the market return for practical considerations similar to
Chiang and Zheng (2010) because Tan et al. (2008) report no difference between the
weighted-average and the equally weighted-average of the market return.
Christie and Huang (1995) advanced the cross-sectional standard deviation (CSSD) as a
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herding model; however, several researchers (BenSaïda et al., 2015; Huang et al., 2015) have
found inconsistent results and questioned its effectiveness. Besides, Chiang and Zheng
(2010) and Chang et al. (2000) report that the CSSD measure is sensitive to outliers.
If the investors are rational and estimate the price in accordance to the CAPM, the CSAD and
Rm relation should be linear and positive. However, if an investor exhibits herding behavior, the
path of the stock return should converge toward the average market trend, instead of deviating
from the market return. The relationship between CSAD and the market average return becomes
2
nonlinear and negative. The nonlinearity of the market average return is captured by Rm;t in
equation (1) (Chang et al., 2000; Henker et al., 2006). If herding is present, g 2 is expected to be
significantly negative (Economou et al., 2011; Economou et al., 2016):

CSADt ¼ a þ g 1 jRm;t j þ g 2 Rm;t

2
þ «t (1)

Theoretical behavioral prediction assumes that herding appears through the correlation
with trading because of individual’s interaction. When some investors ignore their
information to blindly follow other investors’ decisions, they tend to emphasize trading
on a particular stock, leading trading volume to be abnormally high. Thus, I suppose that
trading volume may fuel herding movement. A modified version of Chang et al. (2000)’s
model is presented in equation (2). If herding is present, I expect a negative linear
relationship between the market return dispersion CSAD and the turnover of market
trading volume ( g 3 < 0):

CSADt ¼ a þ g 1 jRm;t j þ g 2 Rm;t

2
þ g 3 Volm;t þ « t (2)

where Volm,t is the turnover of market trading volume at day t, defined as daily trading
volume scaled by daily market capitalization[2]. I choose not to detrend the volume
turnover – by taking the logarithmic difference – similar to Lo and Wang (2000) and
Statman et al. (2006) because if turnover trends are related to overconfidence, detrending
will bias the results against finding a relation between herd behavior and subsequent
trading activity.

3.1 Crisis periods

Harras and Sornette (2011) assert that a bubble is fueled by an adaptive and imitative
mechanism. Because high returns enhance increasing bubbles, I adopt a VAR model to
 provide insight on the predictability between market increasing return squared (as a proxy The French
for the bubble because the relationship between CSAD and the market average return is stock market
nonlinear), volume turnover, CAC 40 volatility index (VCAC as a proxy for investors
sentiment) and CSAD. I deploy Granger causality equations linking the variables in
equation (3):

X
p
yt ¼ a þ Ai yti þ « t (3) 501
i¼1

where yt ¼ ½CSADt ; Rm;t2

; Volm;t ; VCACt 0 is a vector of response at time t, a is a constant
vector of offsets representing a restoring force into the market equilibrium, and Ai is a 4  4
autoregressive matrix for each variable. The presence of herding implies the negativity of
the corresponding coefficient in the estimated matrix Ai. Besides, Hwang and Salmon (2004)
state that CSAD itself is positively correlated with the volatility of returns, and because the
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squared returns are theoretically and empirically positively correlated with the volatility,
negative coefficients are strictly in favor of herding and reject the rational asset pricing
hypothesis. The null hypotheses are that the market return squared, the volume turnover or
the investors sentiment do not Granger-cause herding. I choose the lag p = 1 for practical
considerations.
Several authors suggest that emotional and behavior contagion between investors in
speculative market lead to contagious manias or fads, and subsequent market bubble and
crash (Lux, 1995; Shiller, 2007). Furthermore, investors sentiment could be a central factor in
fueling herding behavior (Hwang and Salmon, 2004); indeed, when an investor is faced by
the fear of market sudden move, he becomes more open to imitate other investors.
Consequently, I revise the model in equation (2) by introducing two variables: a dummy
variable to highlight major financial crises from 2000 till 2016, and a sentiment index to
highlight the degree of insecurity and fear in equation (4):

CSADt ¼ a þ g 1 jRm;t j þ g 2 Rm;t

2
þ g 3 Volm;t þ g 4 Sentt
(4)
þ g 5 Rm;t Dt þ g 6 Volm;t Dt þ g 7 Sentt Dt þ « t
2

The variable Sent represents the investors sentiment and is proxied by the VCAC index,
which corresponds to the implied volatility of Options on the CAC 40 index over the next 30
days. Therefore, I can assert that the VCAC index can be regarded as “the fear gauge” of
investors because it represents the market’s expectation of future volatility (Baker and
Wurgler, 2007).

3.2 Herd behavior and market idiosyncratic conditional volatility

Market conditional volatility depends on past returns. Any exogenous variable that might
affect the market is incorporated in the mean equation. The effect of herding on
idiosyncratic volatility has been insufficiently investigated (Litimi et al., 2016; BenSaïda,
2017). Indeed, Huang et al. (2015) studied the effect of volatility on herding in the emerging
Taiwan equity market, and Majand and Yung (1991) and Venezia et al. (2011) included the
transaction volume in the variance equation in the GARCH model to examine the volume-
volatility interaction.
If herding is present in a stock market, a group of apparently informed investors trades
on some specific stocks that they may have privileged information. These investors are
imitated by other traders, which creates abnormally high transaction volume on those
 RAF specific stocks while leaving other stocks untraded. Karpoff (1987) asserts that it takes
16,4 volume to make prices move; consequently, high trading volume is often followed by high
volatility; thus, the volatility of the traded stock rises, and the overall market average
volatility decreases in large markets because the number of untraded stocks is usually
larger than the traded ones (Litimi et al., 2016). Therefore, herding behavior positively
affects some specific stocks’ volatility but negatively affects the market average volatility
502 (Hwang and Salmon, 2004). Furthermore, the effect of herding on volatility may differ from
sector to sector depending on the group of investors that trades on each industry and the
information they perceive. Formally, I estimate the regression given in equation (5) using
maximum likelihood:

s 2t ¼ a0 þ a1 « 2t1 þ b 1 s 2t1 þ d Volm;t þ g CSADt (5)

 
where Rm;t ¼ « t ! N 0; s 2t are normally and independently distributed error terms. The
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coefficients a0, a1, b 1 are restricted to be positive, whereas the coefficients d and g can take
either positive or negative values to fully capture the dynamics between herding, trading
volume and conditional volatility. The peculiarity of GARCH-type models is that the
conditional expected value of the squared returns – given the available information on past
observations
 Rm;t  1 up to time (t – 1) – equals the conditional volatility, in other words,
2
E Rm;t jRm;t  1 ¼ s 2t . Therefore, if herding is present, the relationship between CSAD and
2
the return squared Rm;t , or its expected value measured by s 2t , is negative. Besides, as
aforementioned, trading volume negatively affects the market volatility in large markets yet
positively affects it in concentrated markets. Hence, I expect that d is positive, whereas g is
negative.

4. Data and empirical results

4.1 Data
The data are composed of all firms listed on Euronext Paris, which are relative to the French
market. The period starts from January 1, 2000 and ends on December 31, 2016, which yields
4,348 daily observations for each firm. The final sample is composed of 232 companies after
removing unavailable data. Following the Industry Classification Benchmark of Euronext,
the French stock market is divided into ten sectors plus an extra one for unclassified
companies (a total of 11 sectors). I further collect the volatility of the CAC 40 index VCAC.
The sample period has four major crises:
(1) The stock market downturn of 2002 (September 10, 2001-October 9, 2002).
(2) The global financial crisis (March 3, 2008-March 31, 2009).
(3) The European sovereign debt crisis (April 23, 2010-August 2, 2012).
(4) The Brexit (June 23, 2016-December 31, 2016).

The stock market downturn and the global financial crisis starting and ending dates match
those fixed by Litimi et al. (2016).
The European sovereign debt crisis started late 2009 and was effectively noticed when
Greece officially asked for the disbursement of money from the aid package on April 23,
2012. Besides, other Eurozone members, namely, Portugal, Spain and Ireland, were unable to
refinance their government debt. The Outright Monetary Transactions program announced
by the European Central Bank on August 2, 2012 has reduced the crisis transmission across
 Eurozone sovereign debt markets. Therefore, I consider this date as the ending date of the The French
European crisis. stock market
The Brexit (Britain exit from the European Union) was a referendum held on June 23,
2016 that has several consequences on European stock markets. The United Kingdom is
expected to withdraw from the European Union by March 2019. Hence, I assess its effects
are still noticeable until the end of the collected sample (December 31, 2016).
503
4.2 Descriptive statistics
Descriptive statistics are presented in Table I. Only the market return takes negative values,
other variables are strictly positive.
Figure 1 provides insight on the presence of herd behavior in the French market, where
the nonlinearity between market return and CSAD measure is obvious. It confirms the
prediction of nonlinear reversal relation between CSAD and Rm, in alignment with Chang
et al. (2000).
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4.3 Cross-sectional absolute deviation model results

According to Table II, the regression results of equation (1) at the sector level show that all
coefficients g 1 on the variable |Rm| are highly significant, indicating the violation of the
linear relationship. Indeed, if the relation between CSAD and Rm was linear, the coefficient
g 1 relative to the absolute value of Rm would be insignificant. In the entire market, the
2
coefficient g 2 relative to Rm is positively significant indicating the absence of herding from
2000 to 2016. However, it is negatively significant in 5 sectors out of 11 (consumer good,
consumer services, financials, oil and gas and others), which indicates the presence of herd
behavior in these five sectors only. Consequently, I need to elaborate the empirical design
beyond the simple model of Chang et al. (2000) to further understand the triggers that lead to
investors consensus.
Regression results of the modified Chang et al. (2000)’s CSAD model equation (2) are
2
reported in Table III. The adjusted R are slightly improved for some sectors, and the
coefficient g 2 becomes positively significant for consumer services (it is still negatively
significant for the remaining four sectors). The negatively significant g 3 (volume coefficient)
in oil and gas sector suggests that investors actively comprehend trading volume
information in this sector, which triggers herding movement. In fact, an investor supposes
that other investors possess first-hand information to trade, and they adopt the same choice
to reduce the risk, at least being in line with market tendency.

Variable Market return Volume turnover CSAD Sentiment index

Mean 0.00014 0.00074 0.01861 23.4325

Maximum 0.087452 0.021481 0.35568 78.054
Minimum 0.093444 3.41e-05 0.005348 9.24
Std. Dev. 0.0090285 0.00129 0.010454 8.8558
Skewness 0.53785 6.6876 13.5844 1.6896
Kurtosis 11.75 67.69 393.54 6.99
Jarque–Bera 14,064* 788,143* 2.77e7* 4952*
P-value [0.000] [0.000] [0.000] [0.000]
Table I.
Note: * The Jarque–Bera test rejects normality for all variables Descriptive statistics
 RAF
16,4

504
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Figure 1.
Market average
return and CSAD
measure

2
Sector Companies count Constant |Rm| Rm2 R

All 232 0.01515* (87.163) 0.23542* (8.2907) 24.2842* (35.358) 0.55

Basic materials 11 0.01044* (53.376) 0.66563* (32.242) 7.5955* (25.741) 0.62
Consumer good 39 0.01033* (65.922) 1.0013* (63.984) 20.04493** (2.241) 0.87
Consumer services 38 0.00956* (54.069) 1.2202* (63.435) 24.7834* (27.798) 0.50
Financials 27 0.00287* (13.085) 1.7665* (175.63) 20.57792* (24.062) 0.93
Health care 19 0.01194* (53.651) 0.66919* (33.840) 4.6324* (25.455) 0.67
Industrials 36 0.01103* (58.845) 0.70087* (24.098) 5.7469* (7.7797) 0.49
Oil and gas 3 0.01138* (34.268) 1.6492* (142.68) 21.1243* (107.54) 0.86
Others 21 0.00355* (13.011) 1.7122* (89.647) 24.3226* (40.945) 0.68
Technology 28 0.01270* (57.169) 0.8989* (42.992) 0.33806 (1.308) 0.53
Telecommunications 6 0.00596* (20.428) 0.54193* (25.209) 2.9767* (15.481) 0.59
Utilities 4 0.00691* (24.516) 0.54447* (30.908) 1.681* (43.444) 0.86
Table II.
Regression of CSAD Notes: Coefficients in bold indicate the presence of herding; *, **Significant at 1% and 5% confidence
on market return level, respectively
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2
Sector Constant |Rm| Rm2 Volm R

All 0.014293* (83.167) 0.19001* (7.0212) 24.0744* (36.902) 1.5084* (19.129) 0.59
Basic materials 0.010336* (52.991) 0.63373* (30.804) 7.818* (26.775) 0.07464* (10.174) 0.63
Consumer good 0.009998* (59.942) 0.9959* (63.916) 20.04293** (2.0385) 1.0021* (6.5249) 0.80
Consumer services 0.011283* (52.705) 0.79921* (25.271) 8.0264* (10.029) 0.1821 (0.5911) 0.53
Financials 0.002371* (10.398) 1.8387* (184.30) 21.1001* (35.204) 0.39856 (0.651) 0.92
Health care 0.01157* (51.598) 0.62408* (31.961) 4.7451* (25.643) 1.8339* (10.390) 0.65
Industrials 0.010801* (57.326) 0.67968* (23.593) 6.0696* (8.3118) 0.6627* (9.6258) 0.50
Oil and gas 0.006008* (14.246) 1.4567* (108.369) 20.9507* (77.286) 17.2063* (10.237) 0.78
Others 0.003963* (10.986) 1.6691* (84.751) 23.6722* (28.853) 0.57191 (0.5408) 0.69
Technology 0.01188* (47.338) 0.88047* (42.350) 0.36467 (1.4037) 1.466* (7.5911) 0.53
Telecommunications 0.005747* (16.57) 0.53572* (24.637) 2.995* (15.540) 1.175 (1.3993) 0.59
Utilities 0.006831* (25.761) 0.44695* (25.763) 1.8311* (49.145) 3.3483* (19.124) 0.87

Notes: Coefficients in bold indicate the presence of herding; *, ***Significant at 1% and 10% confidence level, respectively

Table III.
505
stock market
The French

of CSAD
Modified estimation
 RAF 4.4 The reverberation of financial crises
16,4 Granger causality test results are presented in Table IV. I notice that the sector return
2
squared Rm Granger-causes CSAD in 7 sectors out of 11 (basic materials, consumer good,
consumer services, financials, health care, technology and utilities), and CSAD Granger-
causes the sector average return in seven sectors. The presence of causality from lagged
2
CSAD to market return Rm supports the eventuality of positive feedback in the French
506 market, similar to the Asian market (Choe et al., 1999). The dual Granger causality between
CSAD and both market return and volume turnover strongly confirms the theoretical
prediction that increasing bubbles are an incentive for investors to embark into a transient
collective herding movement.
However, Granger causality test, by itself, does not provide enough insights on
why herding takes place. In fact, Holmes et al. (2013) found that in a concentrated
market, where traders are aware of other market participants’ relative strength and
strategies, herding is intentional and driven by reputational reasons and
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informational cascades.
On the other hand, the Granger causality test between investors sentiment, proxied by
the VCAC and CSAD, shows that this causality is driven in one way from VCAC to CSAD –
except for three sectors (consumer services, health care and technology), where the causality
is dual – which implies that herding fuels the bubble for a certain time until the investors are
hit by the truth and realize the high risk, so they panic. Under fear, these investors rush to
get rid of this stock conveying another herding behavior so the bubble bursts and the stock
price dramatically decreases.
Granger causality analysis shows why it is important to test whether the
investors sentiment is a driving force to herding besides the return squared and
volume turnover. The regression results of equation (4) are reported in Table V. The
variable D t takes the value of one during the following four events (and null
otherwise):
(1) The stock market downturn from September 10, 2001 till October 9, 2002.
(2) The global financial crisis from March 3, 2008 till March 31, 2009.
(3) The European sovereign debt crisis from April 23, 2010 till August 2, 2012.
(4) The Brexit from June 23, 2016 till the end of the collected sample (December 31,
2016).

Herding is still present in the aforementioned detected four sectors (consumer good,
financials, oil and gas and others), as concluded from the model in equation (2). The
modified CSAD model reports that investors sentiment becomes a herding-trigger for
the Telecommunications sector during the entire studied period. Herd behavior is
further detected during turmoil periods in six additional sectors (basic materials,
consumer services, health care, industrials, technology and utilities) depending on the
trigger, which indicates a collective co-movement around the entire French stock
market during turmoil periods, with a significant negative coefficient g 5 relative to
2
Rm D.
To summarize the results, investors in the French stock market are prone to imitate
presumably well-informed traders. This behavior is noticeable in five sectors
(consumer good, financials, oil and gas, telecommunications and others) whether
during a crisis or normal non-crisis period. I suspect that these sectors bear a relatively
higher risk than other industries. Thus, traders are always under the fear of loss and
market rapid shifts, even during tranquil periods, which urges them to enter the herd.
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2 2
Sector Rm ! CSAD CSAD ! Rm Volm ! CSAD CSAD ! Volm VCAC ! CSAD CSAD ! VCAC

All 25.8575* [3.83e-07] 154.0718* [0] 94.006* [0] 19.1805* [1.22e-05] 187.2037* [0] 5.8184** [0.0159]
Basic materials 30.767* [3.08e-08] 53.8297* [2.60e-13] 39.3975* [3.80e-10] 23.0717* [1.61e-06] 198.7773* [0] 1.3091 [0.25261]
Consumer good 46.1517* [1.24e-11] 0.73796 [0.39036] 23.0006* [1.67e-06] 9.4452* [0.00213] 39.9814* [2.82e-10] 2.3916 [0.12206]
Consumer services 3.2221*** [0.07272] 24.8242* [6.52e-07] 3.7373*** [0.05327] 2.5491 [0.11043] 231.5577* [0] 3.3946*** [0.06548]
Financials 34.7682* [3.99e-09] 39.8075* [3.08e-10] 62.0691* [4.22e-15] 4.0979** [0.0430] 48.4072* [3.98e-12] 1.3603 [0.24355]
Health care 4.5253** [0.03345] 7.4617* [0.00633] 0.90809 [0.34068] 0.16339 [0.68607] 79.1857* [0] 3.6346*** [0.05666]
Industrials 0.32446 [0.56897] 72.5384* [0] 21.6435* [3.38e-06] 17.4372* [3.03e-05] 318.04* [0] 0.39316 [0.53067]
Oil and gas 0.048988 [0.82484] 0.33475 [0.56291] 33.5796* [7.33e-09] 1.8429 [0.17469] 8.6732* [0.00325] 0.71663 [0.3973]
Others 1.4243 [0.23276] 2.4853 [0.11499] 0.82816 [0.36286] 0.42173 [0.51611] 54.7069* [1.67e-13] 0.78582 [0.37542]
Technology 9.1636* [0.00248] 97.7668* [0] 6.8619* [0.00884] 6.1232** [0.01338] 179.4543* [0] 3.0784*** [0.07941]
Telecommunications 2.1014 [0.14724] 9.9571* [0.00161] 98.8726* [0] 52.979* [3.98e-13] 32.1851* [1.49e-08] 0.2477 [0.61873]
Utilities 37.8083* [8.90e-10] 0.11966 [0.72943] 20.5161* [6.16e-06] 14.626* [0.000134] 4.9286** [0.0265] 1.8842 [0.16997]

Notes: p-values are in brackets*, **, ***Granger-cause at 1%, 5% and 10% level, respectively

test results
Table IV.
507
stock market
The French

Granger causality
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crises
508
RAF

Table V.
Regression of
herding during
financial bubbles and
2
Sector Constant |Rm| Rm2 Volm Sent Rm2*D Volm*D Sent*D R

All 0.00866* (31.739) 0.18297* (7.5341) 32.4623* (56.004) 1.0771* (15.597) 0.000239* (17.840) 225.6207* (37.495) 3.4905* (12.506) 1.001e-05 (1.0158) 0.71
Basic materials 0.00715* (18.219) 0.59203* (26.987) 8.1037* (27.945) 0.05385* (7.1886) 0.00017* (9.1682) 0.68385 (1.3835) 0.30462* (8.8148) 26.810e-05* (5.5966) 0.64
Consumer good 0.00754* (21.641) 1.0058* (49.928) 20.054** (2.0855) 0.80706* (5.0168) 0.00011* (6.655) 22.9847* (4.4187) 0.982*** (1.8746) 3.641e-06 (0.2975) 0.80
Consumer services 0.00733* (19.252) 0.72657* (23.295) 12.6285* (15.025) 0.17131 (0.4913) 0.00018* (10.355) 29.8789* (12.393) 22.6519* (3.9803) 3.661e-05* (2.6619) 0.56
Financials 0.00487* (9.0258) 1.8425* (164.427) 21.139* (36.117) 1.8968* (2.9391) 20.00011* (4.4546) 0.16762*** (1.805) 218.0078* (7.5477) 0.0001* (4.3293) 0.93
Health care 0.00713* (15.346) 0.55125* (28.284) 6.3014* (31.831) 2.1456* (10.840) 0.00022* (10.093) 23.6272* (15.295) 0.12866 (0.34933) 2.19e-05 (1.5849) 0.68
Industrials 0.00719* (21.87) 0.59324* (21.535) 12.9227* (17.153) 0.53962* (7.9024) 0.00016* (10.270) 214.5617* (21.093) 0.78013* (3.3547) 5.667e-05* (5.4395) 0.56
Oil and gas 0.00291* (3.688) 1.3896* (98.488) 20.9196* (75.12) 10.7696* (5.4053) 20.00035* (8.505) 0.36116* (19.628) 8.7147** (2.3499) 20.0002* (5.7689) 0.82
Others 0.00412* (6.4724) 1.5029* (69.257) 23.6025* (29.069) 1.0432 (0.8317) 4.88e-05*** (1.6482) 4.4877* (17.101) 3.2718 (1.5003) 3.171e-05 (1.1761) 0.71
Technology 0.00774* (16.340) 0.79841* (36.053) 0.6666* (2.579) 1.515* (6.3124) 0.00022* (9.5554) 1.2108* (2.6274) 20.689*** (1.7703) 2.72e-05 (1.5629) 0.54
Telecommunications 0.00841* (13.265) 0.58897* (26.901) 3.1375* (16.357) 4.533* (4.0233) 20.00019* (6.0141) 22.6599* (10.286) 0.57597 (0.3280) 5.30e-05** (2.1386) 0.60
Utilities 0.00372* (5.7285) 0.4754* (24.186) 1.7894* (44.446) 3.2884* (18.409) 9.361e-05* (2.9701) 22.5561* (6.0602) 3.8541* (4.7403) 6.842e-05* (3.6003) 0.88

Notes: Coefficients in bold indicate the presence of herding*, **, ***Significant at 1%, 5% and 10% confidence level, respectively
 During turmoil periods, however, investors embark into a collective herd behavior in The French
the remaining sectors and the triggers to their comportments depend on the sector stock market
average return (for consumer services, health care, industrials and utilities), the
amplitude of volume turnover (for technology) and their sentiment (for basic materials).
Table VI abridges the results by indicating the herding trigger for each sector.

4.5 Herding and GARCH estimation 509

To detect the impact of herding and volume turnover on market conditional volatility, I
estimate the market average return volatility equation (5) for each sector. Results are
presented in Table VII along with the corresponding Bayesian information criteria
(BIC).
Results clearly show that herding negatively affects the conditional volatility of the
sector average return in all sectors. For the volume turnover, however, it negatively
affects the volatility in only basic materials and oil and gas, and it has a significant
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positive effect in eight sectors besides the entire market. This finding is similar to
Blasco et al. (2012) on the Spanish stock market, Balcilar et al. (2014) on the Gulf Arab
stock markets, Huang et al. (2015) on the Taiwan equity market and Boubaker et al.
(2015) on the Egyptian market because these markets are concentrated and the overall
market volatility is more respondent to the volatility of the specific stocks traded by
informed investors.
Technically, equation (1) suggests that if herding is present, then there should be a
negative relationship between CSAD measure and the square of market average return,
which has been verified in Table II. Similarly, the GARCH model states that the
expected value of the conditional squared residual « t, where « t = Rm,t, equals the
2
conditional volatility E Rm;t jRm; t  1 ¼ s 2t , so if herding is present, I suspect a negative
relationship between the conditional volatility and the CSAD measure. Holmes et al.
(2013, p. 8) argues that “intentional herding might be expected to be more evident when

Sector Sector return Volume Volume turnover Investors Investors sentiment

Sector return during turmoil turnover during turmoil sentiment during turmoil

All – O – – – –
Basic materials – – – – – O
Consumer good O* O – – –
Consumer services X** O – O – –
Financials O* – – – O –
Health care – O – – – –
Industrials – O – – – –
Oil and gas O* – O* – O O
Others O* – – – – –
Technology O
Telecommunications – O – – O –
Utilities – O – – – –

Notes: The O sign indicates that the specified factor is a trigger for herding reported in Table V [equation
(4)]. The X sign indicates a previously found possible trigger, but removed later from Table V as it does not
appear to be the true herding cause; *Reported as a herding trigger in Table II [CSAD, equation (1)] and Table VI.
Table III [modified CSAD, equation (2)]; **Reported as a herding trigger only in Table II [CSAD, Herding results
equation (1)] summary
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510
RAF

Table VII.

of average market
GARCH Estimation

conditional volatility
2
Sector Constant Rm;t1 s 2t1 Volm,t CSADt BIC

All 2e-07 (0.0667) 0.06133* (5.2635) 0 (0) 0.00169* (4.1143) 0.00297* (19.355) 30295.12
Basic materials 2e-07 (0.04406) 0.00049 (0.0910) 0 (0) 0.00034*** (1.7462) 0.00629* (27.790) 27742.17
Consumer good 2e-07 (0.0616) 0 (0) 0 (0) 0.003298* (9.7848) 0.00451* (107.56) 29113.69
Consumer services 2e-07* (8.9812) 0.00135* (71.808) 0 (0) 0.00803* (17.242) 0.00431* (52.611) 29469.92
Financials 2e-07 (0.0620) 0 (0) 0 (0) 0.019595* (25.459) 0.00812* (56.254) 26808.29
Health care 2e-07 (0.0401) 0.04148* (4.6108) 0 (0) 0.016026* (13.961) 0.00747* (31.568) 26582.01
Industrials 2e-07 (0.04602) 0 (0) 0 (0) 0.00231* (3.7169) 0.005* (24.790) 28791.67
Oil and gas 2e-07 (0.02994) 0.12584* (9.1326) 0.6931* (73.528) 0.71614* (24.351) 0.00806* (80.282) 19056.41
Others 2e-07 (0.09705) 0.1506* (70.072) 0 (0) 0.01489* (9.2842) 0.00703* (38.095) 26784.89
Technology 2e-07 (0.0360) 0.04283* (4.0367) 0 (0) 0.00875* (15.8287) 0.00645* (30.170) 26741.93
Telecommunications 2e-07 (0.0789) 0.22969* (19.639) 0.3053* (31.421) 0.03109* (12.312) 0.0104* (36.801) 23814.35
Utilities 5.02e-05* (20.986) 0.19376* (13.304) 0.08137* (5.4534) 0.00989 (1.0517) 0.00949* (28.915) 15803.36

Note: *, ***Significant at 1% and 10% confidence level, respectively

 volatility is low”. Consequently, the presence of a negative relationship between the The French
level of herding and the market conditional volatility is a strong evidence of herding stock market
behavior. Table VII confirms this statement for the whole market and for all sectors
with a highly significant negative coefficient g (relative to CSAD).
Figure 2 plots the conditional volatility for all sectors. The shaded areas represent the
four crisis periods:
(1) The stock market downturn. 511
(2) The global financial crisis.
(3) The European sovereign debt crisis.
(4) The Brexit.

I deliberately choose the same axes for comparison purpose. Data for companies in the
sector utilities are available from late 2005, which explains the missing conditional volatility
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in this sector.
I notice that the volatility is remarkably high during the entire period for
financials, oil and gas, telecommunications and others, which confirms the detected
collective behavior of investors in these specific sectors. For Consumer good,
however, the conditional volatility is rather low; thus, I suspect that investors in this
sector are more sensitive to price fluctuation than in other sectors. Consequently,
driven by the fear of prices sudden move, investors try to imitate each other when
trading consumer good’s stock, so they embark into a collective herd behavior even
during periods of tranquility.

5. Conclusion
Herding is present in the French stock market during crisis periods that occurred from
2000 to 2016. It is also present during the whole period in some sectors (5 out of 11) and
does not affect the entire market. The main trigger for investors to embark into a
collective herding movement differs from one sector to another, i.e. it can be related to
the sector average return, the volume turnover or investors sentiment. Additionally,
empirical findings provide a potential explanation to the nature of association between
herding and market conditional volatility. Indeed, herding has an inhibiting effect on
the average return volatility in all sectors. Furthermore, trading volume positively
affects the conditional volatility for the entire market and for most sectors. I suspect
that informed traders are relatively fewer in these sectors or at least the investors do
not recognize informed from uniformed traders, so higher trading on specific stocks are
less noticeable, and the volatility of the sector average return becomes positively
affected by the volume turnover.
This paper offers a detailed explanation of investors herd behavior in the French
stock market. The sectoral analysis further shed light on their comportment. Indeed,
the absence of herding in any market does not necessary mean that it is absent in all
sectors that compose the market. Moreover, investors, faced by the fear of loss in
periods of crisis or when trading relatively risky stocks, exhibit a collective co-
movement and imitate presumably well-informed traders. The sectoral analysis in the
French stock market could be extended to analyze more deeply the herd behavior in
other developed or emerging economies to show that, in presence of high risk, investors
throw away their rationality to embark into a collective herd behavior.
 RAF
16,4

512
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Figure 2.
Conditional standard
deviations of sector
average returns
 Notes The French
1. It is worth noting that Hwang and Salmon (2004) have introduced a measure to herding based on stock market
macro factors. However, their model needs to reduce the frequency of the collected data, and we
prefer measuring herding behavior on daily basis.
2. Yao et al. (2014) have used the detrended volume turnover squared; however, they did not present
any justification, so it seems plausible for us to consider a simple linear relationship.
513
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Corresponding author
Houda Litimi can be contacted at: houda.litimi@gmail.com
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