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Project Leaders: Pierre Siklos

The euro zone crisis and the "global" financial crisis of 2007‐2009 have sparked interest in improving our understanding of financial market interrelationships. Due to the rise of financial globalization over the past two decades, regulators worry that contagion and herding phenomena are more common. Hence, events that produce large movements or greater asset price volatility in one location may be transmitted to other locations around the globe, even if there are no fundamental economic reasons to expect such an outcome. For example, fears of a global meltdown in equity markets led to the imposition of short-selling bans on equities in 2008. While most of these bans have since been withdrawn, several countries in the euro zone re‐introduced them in 2011 because of their sovereign debt crises. Concerns over the interconnectedness of financial markets were also heightened by the realization that equity prices are greatly influenced by institutional investors, including hedge funds.

These recent events highlight the inadvisability of separating micro- from macroprudential concerns. Microprudential side policies regulate the behaviour of individual institutions while macroprudential concerns ensure good monetary policy is paralleled with financial system stability. In this project, researchers investigate empirically policy makers’ reactions to an unfolding financial crisis and the negative externalities that emerge in the form of poorly functioning financial markets. At the macro level, the project investigates whether the bond and equity markets in the throes of a financial crisis can be linked to overall economic performance. Ultimately, the aim is to propose policy responses leading to improved financial governance.

Publications from this project, initiated in 2012, will begin to appear in 2013.

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A Markov Switching Approach to Herding

December 4, 2013
CIGI Paper No. 21
Martin T. Bohl, Arne C. Klein, and Pierre Siklos
This paper proposes a Markov switching herding model. By means of time-varying transition probabilities, the model is able to link variations in herding behaviour to proxies for sentiment or the macroeconomic environment. The evidence for the US stock market reveals that during periods of high volatility, investors disproportionately rely on fundamentals rather than on market consensus.

Bans on short selling can lead to adverse herding among investors, CIGI-sponsored researchers find

Thursday, May 9, 2013
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Short-selling Bans and Institutional Investors' Herding Behaviour: Evidence from the Global Financial Crisis

May 9, 2013
CIGI Papers No. 18
Pierre Siklos, Martin T. Bohl, and Arne C. Klein
The authors examine bans on selected financial stocks in six countries during the 2008-2009 global financial crisis, which provided a setting to analyze the impact of short-sale restrictions. In particular, the authors focussed on short-sale constraints’ effect on institutional investors’ trading behaviour and the possibility of generating herding behaviour. They conclude that the empirical evidence shows that short-selling restrictions exhibit either no influence on herding formation or induce adverse herding.
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