Herding behavior and stock market conditions

Abstract

Purpose The purpose of this paper is to investigate whether market conditions have an effect on investors’ propensity to herd in an emerging economy’s stock market. Additionally, given the lack of research on Islamic behavioral finance, the authors further investigate if the herding phenomenon is distinct in Islamic versus conventional stocks. Design/methodology/approach The authors used daily data for the period of 1995–2016 according to the herding behavior model of Chang et al. (2000), which relies on cross-sectional absolute deviation of returns. Findings Findings reveal the herding behavior of investors among Shariah-compliant during up and down market exits with non-linear relationship to the market return, while for conventional stocks herding behavior does not exist with linear nor nonlinear relationships during the up and down market. Furthermore, for the whole market, herding behavior only exists during upmarket with a nonlinear relationship to the market return. However, this relationship is not significant. Moreover, the results of this study are robust with respect to the effect of the Asian and global financial crisis. Practical implications The findings are useful for investors to identify which market conditions are associated with rational and irrational behavior of investors. Originality/value Most of the theoretical and empirical studies on herding behavior have focused on developed countries. Only a few studies have paid attention to the herding behavior in Islamic financial markets, particularly in the context of an emerging market such as Malaysia. This study fills this void.

The COVID-19 pandemic and herding behaviour among investors in Shariah-compliant stocks

“…They rely more on their own information. Our results contradict findings in Mand et al (2021) who provide evidence on the presence of herding behaviour among investors in Shariah-compliant stocks in Malaysia during the period 1995–2016.…”

“…Moreover, their findings reveal that investors tend to copy each other during all important events, namely, the post-establishment period of the Finance Regulatory Committee of Mongolia and the Global Financial Crises as well as the post-inclusion period of Mongolia in the FTSE Russell Watch and the economic boom in 2011. Mand et al (2021) use daily data from listed companies in the stock market of Malaysia for the period of 1995–2016 to investigate whether market conditions have an effect on investors’ propensity to herd and whether the herding phenomenon is distinct in Shariah-compliant versus conventional stocks. They point out that herding behaviour exists among investors in Shariah-compliant stocks during bull and bear market, whereas there is no evidence on the existence of herding behaviour on the part of investors in conventional stocks during the up or the down market.…”

Detecting the Herding Behaviour in the South African Stock Market and its Implications

“…Ah Mand et al, (2021) From the above specification, the presence of herding behaviour is detected by the coefficient (Ƴ 3 ). The CSAD measures the deviation of stock returns from the market return at any given day.…”

“…In financial markets, it has been well documented that investors adopt herd mentality (Hachicha, 2010;Filip et al, 2015;Braga, 2016;Ababio and Mwamba, 2016;Choi and Yoon, 2020;Ah Mand et al, 2021;Bharti and Kumar, 2021;Espinosa-Méndez and Arias, 2021). More specifically, investors tend to follow similar investment strategies simply because others are doing the same (Benartzi and Thaler, 2001).…”

“…;My and Truong, (2011);Boutabba, (2014);Filip et al, (2015); Braga, (2016);Ababio and Mwamba (2016);Choi and Yoon (2020); AhMand et al, (2021);Bharti and Kumar (2021);Graisse (2020)). …”