University of Twente Student Theses


The COVID-19 Outbreak and Investor Herding : An Empirical Study of the VWRL All-World Exchange-Traded Fund

Reitsma, T.S. (2023) The COVID-19 Outbreak and Investor Herding : An Empirical Study of the VWRL All-World Exchange-Traded Fund.

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Abstract:Volatility in financial markets increased when the World Health Organization declared Covid-19 a global pandemic in March 2020. When financial markets become more volatile, investors tend to exhibit herding behavior, particularly when it comes to decision-making under uncertainty and market stress. This means that investors are not using their own judgement but instead are following the crowd. There are several strong indications that herding behavior was exhibited among investors during the COVID 19 period. Therefore, the aim of this study is to examine how the Covid-19 pandemic has influenced investor herding behavior in the globally diversified VWRL All-World Exchange-Traded Fund in the time period between the 1st of January, 2018, and the 31st of December, 2022. More specifically, the two static herding models Cross Sectional Standard Deviation (CSSD) and Cross-Sectional Absolute Deviation (CSAD) were used respectively to identify herding behavior. Contrary to expectations, the results suggested that investors' decisions were based on rational considerations, indicating that they made independent judgments rather than simply following the crowd. Using a static approach, such as CSSD and CSAD, can lead to uncertain results due to the fundamentally dynamic nature of herding behavior. Therefore, a dynamic regression analysis is applied which is capable of capturing a dynamic effect, making the output more visual and informative. By using this dynamic analysis, we can gain a deeper understanding of the dynamics of the underlying process. Based on the results of the dynamic analysis, there are five signs of herding behavior throughout the full sample period that can be linked to global macroeconomic events. However, the outcomes were not statistically significant, which is what we expected beforehand. This study contributes to the literature by studying a globally diversified exchange-traded fund and using both static and dynamic regression analysis methods, which allows us to examine whether herding varies over time in a more visual, dynamic, and informative way.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Business Administration MSc (60644)
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