Herding towards higher moment CAPM, contagion of herding and macroeconomic shocks: Evidence from five major developed markets

This study firstly tries to investigate the existence of herding towards market, coskewness and cokurtosis for five developed markets (i.e. France, Germany, UK, USA and China). The state space model of Hwang and Salmon (2004) has been employed. Using monthly data for all stocks that constitute these particular indexes over the 2003–2011 period, we find significant evidence of herding towards the selected risk factors. Moreover, unexpected shocks on some macroeconomic variables result in the emergence of herding. The findings also confirm cases of contagion of herding during crises periods and bad economic conditions casting doubts on the benefits of international portfolio diversification.