Nonlinearities, Herd Behaviour and Market Illiquidity: Evidence from Montenegro?
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Abstract
Research in Finance has shown that herd behaviour is associated with nonlinear dynamics in both developed and emerging stock markets. However the latter are characterized by thin trading which has been found to amplify nonlinearities in returns by enhancing their serial dependence. If so, then the association between herding and nonlinearities may be subject to the thin trading bias. As this issue has never explored before, we investigate this in the context of the New Securities Stock Exchange of Montenegro. Results indicate that correcting for thin trading bears a notable impact upon the observed nonlinearities, yet not the estimated herding, which appears insignificant in all test.
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