Herding or Anti-Herding? Understanding Investor Behavior in the Baltic States

Abstract

This paper investigates market-wide herding behavior in the stock markets of Estonia, Latvia, and Lithuania, employing measures that assess the proximity of market returns to market consensus. Using a survivor-bias-free dataset of daily stock returns, we document significant anti-herding behavior among investors in Latvia and Lithuania throughout the sample period. Results for the Estonian market vary based on the herding measure chosen. Herding dynamics fluctuate over time, with the COVID-19 pandemic increasing the intensity of the effect in Estonia and Lithuania. Moreover, the deterioration of investor sentiment and stronger funding restrictions are found to amplify herding in these two markets. Estonia's market displays asymmetric behavior, with herding being more pronounced during negative market performance. Collectively, these findings are relevant to management practice since they suggest that it is difficult to extract the desired benefits of international diversification in the Baltic region, especially during market downturns.