Economic policy uncertainty and herding behavior: evidence from the South African housing market

Abstract

This paper examines the link between economic policy uncertainty and herding behaviour in financial markets with an application to the South African housing market. Building on the evidence in the literature that herding behaviour driven by human emotions is not only limited to financial markets, but is also present in real estate investments, we examine the presence of herding in this emerging market via static and dynamic herding tests. While the static model fails to detect herding in the South African housing market, a dynamic model based on a two-regime Markov switching specification shows evidence of herding during the high volatility regime only, consistent with the notion that herd behaviour is primarily driven by increased market uncertainty. Extending our analysis via quantile regressions, we further show that higher quantiles of policy uncertainty are associated with greater likelihood of being in the herding regime, thus establishing a link between policy uncertainty and herding behaviour. Overall, our findings suggest that policy uncertainty can serve as a driver of market inefficiencies, which in our case, is associated by the presence of herding.