Economic Policy Uncertainty and Herding Behavior Evidence from the South African Housing Market
This paper examines the link between economic policy uncertainty and herding behaviour infinancial 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.
Herding, Housing Market, South Africa, Regime-Switching, Uncertainty
C34, G11, G15