Herd Behaviour, Fundamental, and Macroeconomic Variables – The Driving Forces of Stock Returns: A Panel-Based Pooled Mean Group Approach

Abstract

The existing research aims to seek the herding effects on stock returns at the industry level in Pakistan Stock Exchange (PSX). Moreover, the relationship between stock returns and herding has been studied by taking some macroeconomic (exchange rate, interest rate, and inflation rate) and fundamental (return on equity and earnings per share) control variables. Herding is actually imitating other’s behaviour. This phenomenon indicates a situation where the investors follow the crowed and ignores their personal information, despite knowing the correctness of their information. Herd behaviour may drive from fundamental factors leading to efficient markets. However, it may not be associated with fundamental information causing unstable prices. The stock price data of PSX listed companies from 1999 to 2017 have been the point of focus. The underlying herding measure was the cross-sectional absolute deviation (CSAD), proposed by Chang et al. (2000). The significant analysis technique facilitating the current research is pooled mean group (PMG)/panel autoregressive distributed lag (ARDL) approach. Findings revealed that some sectors are evident for positive effect of herding on stock returns, whereas some others are witnessed for its negative effects on stock returns, in both long run and short run. As far as the control variables are concerned, they demonstrated both significant and insignificant effects on stock returns in different sectors of PSX. The study has important implications for policymakers.

Determinants of Stock Return and Firm Value of Manufactures Listed at the Indonesian Stock Exchanges

“…Technical analysis which studies past prices and volume has been used to predict future returns (K. H. Chen et al, 2021;Ma et al, 2021;Masry, 2017). In addition, external factors such as political incidents, war, oil prices, inflation rates, exchange rates, and interest rates have also been found to affect stock returns (Jabeen et al, 2022).…”

The influence of Indonesia’s macroeconomic factors: Inflation and interest rate on large-cap cryptocurrency herding behavior

“…Herding behavior, according to Jabeen, Rizavi, and Farhan (2022), leads investors to put aside their personal information to follow the crowd, even the realization that their personal information is believed to be accurate. Bikhchandani and Sharma (2000) define "intentional" herding as a clear intention to imitate the behavior of other investors, which can destabilize markets and increase volatility.…”

“…That behavior is called herding behavior. According to Jabeen et al (2022), herding behavior causes investors to set aside their personal information to follow the crowd, even though their personal information is thought to be accurate.…”