Bond market investor herding: Evidence from the European financial crisis

During the recent financial crisis, numerous EU officials, market participants and the media suggested that irrational herding was a key factor for the financial turmoil and the soaring yield spreads. In this paper we test for evidence of herd behavior in European government bond prices and, overall, we find no evidence of investor herding either before or after the EU crisis. We do find, however, in an original contribution to the bond market literature, strong evidence that during the EU crisis period, macroeconomic information announcements induced bond market investor herding; a finding that confirms the notion of 'spurious' herding proposed by Bikhchandani and Sharma (2001) for bond markets. Further tests reinforce this finding and also indicate the existence of herding spill-over effects.