G10 - General Financial Markets: General (includes Measurement and Data)Return

Over the recent decades, the world has experienced several major disruptive events with far-reaching global impacts on societies, economies and financial systems. This study investigates the financial market reactions to one of the most recent global disruptive events, the COVID-19 pandemic, focusing on the role of investors' herding behaviour during uncertainty. While previous research has mainly explored this on Asian and American markets, our study addresses this gap in understanding Northern European reactions, particularly in rising and falling markets, and aims to explore the existence of herding during the COVID-19 pandemic and to further investigate its occurrence and intensity during the periods of upward and downward movements. It uses Nasdaq Nordic and Baltic daily stock data and employs the cross-sectional absolute deviation method to estimate the reaction of individual Nordic and Baltic stock markets. The results reveal that herding was observed on three out of four Nasdaq Nordic stock markets (Sweden, Denmark and Finland) and one out of three Nasdaq Baltic stock markets (Lithuania). This behaviour persisted throughout the entire COVID-19 period and during market downturns, with no herding observed during upward market movements. This study contributes novel insights into herding on Northern European stock markets, highlighting distinct investor responses to the same global disruption and emphasizing the likelihood of herding during market downturns due to fear and uncertainty. Additionally, the research indicates more pronounced herding behaviour in developed rather than frontier stock markets, suggesting that during global disruptive events, smaller and less liquid stock markets might react more rationally, although more research is needed.
Implications for Central European audience: Acknowledging herding behaviour during global disruptive events is relevant for both investors and policymakers. Investors in Central and Eastern European countries can benefit from their awareness of herding behaviour, especially during market downturns, by taking advantage of mispriced assets. Moreover, understanding the psychological biases driving herding can promote more rational decision-making, enabling investors to resist panic selling. Meanwhile, policymakers can implement measures to promote market rationality, such as investor education programmes, aimed at building investors’ cognitive resilience and understanding of portfolio management strategies during turbulent times. Investors’ ability to recognize and mitigate the effects of herding behaviour should enhance their rationality and promote more efficient financial markets.

This article aims at analyzing the relationship between sustainable development and the financial system, mainly focusing on the role that the financial system plays within the process of sustainable development. Theoretically, the financial system could be a very important factor to promote sustainable development, as it could foster economic growth and development, efficient resource allocation, the protection of the environment and also social responsibility. Using panel data econometrical analysis, we tested for correlations between indicators of the financial system and indicators of sustainable development in five developing Eastern European countries. We found weak or no correlation between financial indicators and sustainable development indicators. This might be explained by several facts. First, the financial systems of these five developing countries are not highly developed, so that they do not have a high capacity to foster economic growth and development. Second, even if this was the case, promoting sustainable development requires a lot more than fostering economic growth and is not a question of whether the financial companies can promote sustainability, but whether they are interested in promoting it. Even though financial companies have embraced the sustainability agenda, they haven`t done much to change their short-term orientation to profit and to shift to long-run strategies in favor of sustainable development.