Herding behavior in the European banking sector during the COVID-19 outbreak: The role of short-selling restrictions

The purpose of the current paper is twofold: (1) to examine the impact of uncertainty induced by COVID-19 pandemic on herding behavior, and (2) to understand whether short-selling restrictions have mitigating role in herding behavior. We employ both cross-sectional market deviation (CSSD) and cross-sectional absolute standard deviation (CSAD) approaches to detect herding in European capital markets. For robustness analysis, we estimate herding behavior under different market dynamics, namely high-low volatility periods and up-down markets. We find no strong evidence regarding herding in prior to pandemic; however, herding behavior is more common in the COVID-19 period, indicating triggering role of uncertainty in herding behavior. The results are robust to the herding models whereas they are sensitive to the asymmetric effects. Regarding the short-selling restrictions, we fail to support the impact of short-selling limitations on herding behavior since there is no difference between restricted and unrestricted periods. The overall results indicate that herding behavior prevails amid the pandemic, confirming that fear and uncertainty induced by COVID-19 causes less-informed investors to follow the actions of others. Investors should consider this inefficiency when investing in capital markets. Besides, short-selling restrictions do not have significant impact on herding, suggesting regulatory authorities should employ other tools rather than short-selling bans.