The Dynamic Interaction Between Geopolitical Risk and Herd Behavior: Evidence From The Dow Jones Industrial Average

Abstract

This paper investigates the dynamic influence of global geopolitical risks on herd behavior among stock market investors. The analysis includes 30 companies listed on the Dow Jones Industrial Average (DJI) index from January 2010 to March 2024. To establish the presence of herd behavior, the cross-sectional absolute deviation (CSAD) model was employed. Subsequently, the conditional dynamic correlation between geopolitical risks and herd behavior was examined using the BEKK-GARCH and DCC-GARCH models. The results provide strong evidence of herding bias among investors in the DJI index over the study period. Furthermore, the findings reveal a dynamic conditional relationship between geopolitical risks and herd behavior, with prior geopolitical risk shocks having a positive effect on market herding behavior. Finally, given the evidence that herding behavior, as a form of behavioral distortion, can drive security prices away from equilibrium values supported by fundamentals and cause price bubbles, our findings have important implications for policymakers and investors to mitigate herding effects and misvaluations