Business cycle and herding behavior in stock returns: theory and evidence

Kwangwon Ahn, Linxiao Cong, Hanwool Jang, Daniel Sungyeon Kim*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)
21 Downloads (Pure)


This study explains the role of economic uncertainty as a bridge between business cycles and investors’ herding behavior. Starting with a conventional stochastic differential equation representing the evolution of stock returns, we provide a simple theoretical model and empirically demonstrate it. Specifically, the growth rate of gross domestic product and the power law exponent are used as proxies for business cycles and herding behavior, respectively. We find stronger herding behavior during recessions than during booms. We attribute this to economic uncertainty, which leads to strong behavioral bias in the stock market. These findings are consistent with the predictions of the quantum model.

Original languageEnglish
Article number6
JournalFinancial Innovation
Issue number1
Publication statusPublished - 3 Jan 2024


  • Business cycle
  • Economic uncertainty
  • Herd behavior
  • Power law exponent
  • Quantum model

ASJC Scopus subject areas

  • Finance
  • Management of Technology and Innovation


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