Group Behavior and Systemic Risk in Financial Markets: A Behavioral Finance Perspective on Crisis-Preceding and Post-Crisis Effects

This study analyzes the effects of collective investor behavior on systemic risk in financial markets using principles from behavioral finance. The research investigates how investor sentiment and emotional reactions together with herding behavior affect market instability during different stages of financial crises. Data analysis from the 2007-2009 Global Financial Crisis (GFC) lets us investigate the effect of irrational investor behavior on market volatility and systemic risk. The study analyzes important financial indicators such as stock market returns and volatility indices along with credit default swap spreads which are compared with sentiment data gathered from social media networks. Investor herd actions combined with overreactions to news events create market instability because stock market behavior moves away from economic fundamentals according to our analysis. This research advances understanding of how collective actions of investors create irrational market patterns and worsen financial crises. The study suggests ways to manage systemic risk with regulatory policies that include behavioral insights within financial regulation structures.