Abstract:
Herding as a bias refers to the investment decision based on the decisions of other investors in market. This study aims at finding out whether Pakistani investors, in extreme market conditions, are prone to herding bias while making their investment decisions or not. Cross Sectional Standard Deviation (CSSD) and Cross Sectional Absolute Deviation (CSAD) have been used to measure herding. Higher the value of CSSD, lower the tendency of herding and vice versa. Extreme market has been defined at 5% and 10% extreme values of the series of daily market returns for the period 2000-2014. Extreme market situation, when defined at 5%, exhibits the existence of herding in down market situation with a negatively significant value of ß2 (ß2 = -0.0026, t-value = -1.94). Whereas for the extreme market defined at 10%, herding is significantly found in both up and down market conditions depicted by negatively significant values of ß1 and ß2. Examination of non linear and asymmetric relationship between cross sectional standard deviation (CSSD) and market returns also shows the same results. As for the turnover effect in herding, value of the ß for DLt and DUt remain positive and insignificant for high turnover stocks implying that dispersion between stock returns and market returns does not reduce in up and down markets i.e. no herding exist. However for Low Turnover Standard Deviation (LTSD) value of ß2 that is for DLt remain significantly negative (t-value = -5.33) showing reduction in dispersion between low turnover stock returns and market returns in down market which is exactly in accordance to herding theory.
Page(s):
60-69
DOI:
DOI not available
Published:
Journal: Pakistan Journal of Life and Social Sciences, Volume: 14, Issue: 2, Year: 2016
Keywords:
Pakistan
,
Empirical investigation
,
Herding
,
Karachi Stock Exchange