Int. Fin. Markets, Inst. and Money 21 (2011) 443–460 Contents lists available at ScienceDirect Journal of International Financial Markets, Institutions & Money journal homepage: www.elsevier.com/locate/intfin Cross-country effects in herding behaviour: Evidence from four south European markets Fotini Economou a , Alexandros Kostakis b,* , Nikolaos Philippas a a Department of Business Administration, University of Piraeus, 80 Karaoli and Dimitriou, 18534 Piraeus, Greece b Management School, University of Liverpool, Chatham Building, L69 7ZH Liverpool, UK article info Article history: Received 28 June 2010 Accepted 24 January 2011 Available online 24 February 2011 JEL classification: G01, G12, G15 Keywords: Herding behaviour PIGS International financial markets Cross-sectional dispersion of returns Financial crisis abstract This study provides comprehensive evidence testing for the exis- tence of herding effects in the Portuguese, Italian, Spanish and Greek market, constructing a survivor-bias-free dataset of daily stock returns during the period January 1998–December 2008. Moreover, it examines the potential asymmetries of herding effects with respect to the sign of the market return, trading activity and volatility. A novel feature of this study, with implications for financial stability in the Eurozone and international portfolio diver- sification, is to examine whether the cross-sectional dispersion of returns in one market is affected by the cross-sectional dispersion of returns in the rest three markets. Finally, it tests whether herd- ing effects became more intense during the recent global financial crisis of 2007–2008. © 2011 Elsevier B.V. All rights reserved. 1. Introduction The recent global financial crisis clearly demonstrated that market prices may considerably deviate from fundamental values for prolonged periods. Liquidity constraints, asymmetric information, limits to arbitrage and other frictions are the commonly cited culprits for this phenomenon (see Shleifer, 2000; Brunnermeier, 2001 for an introduction). These features pose a constant threat to financial stability exposing market participants and financial institutions to unhedgeable systemic risk. A well documented behaviour encountered in such extreme market conditions is herding, defined as the mutual imitation leading to a convergence of action (Shefrin, 2000; Welch, 2000; Hirshleifer and * Corresponding author. Tel.: +44 151 795 3123. E-mail addresses: feconom@unipi.gr (F. Economou), a.kostakis@liverpool.ac.uk (A. Kostakis), philipas@unipi.gr (N. Philippas). 1042-4431/$ – see front matter © 2011 Elsevier B.V. All rights reserved. doi:10.1016/j.intfin.2011.01.005