Applying an alternative test of herding behavior: a case study of the Indian stock market

Saumitra, Bhaduri and Sidharth, Mahapatra (2012): Applying an alternative test of herding behavior: a case study of the Indian stock market.

Abstract

The paper presents an alternative approach to test the herding behavior in the Indian equity market using symmetric properties of the cross sectional return distribution instead of the traditional standard deviation of the portfolio-based approach. Using the proposed approach, we find evidence of herding in the Indian market during the sample period. We also observe pronounced herding during the 2007 crash in the Indian equity market. Finally, we also observe that the rate of increase in security return dispersion as a function of the aggregate market return is lower in up market, relative to down market days, which stands contrary to the directional asymmetry documented by McQueen, Pinegar, and Thorley (1996).

• Item Type: MPRA Paper
• Language: English
• Keywords: Herding Equity Market India
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Shiller J., Robert. (1987). Investor Behavior in the October 1987 Stock Market Crash: Survey Evidence , NBER Working Paper WP 2446.

Bikhchandani S., Sunil. S. (2000). Herd Behavior in Financial Markets, IMF Working Paper WP/00/48. Black, F., 1972, Capital market equilibrium with restricted borrowing, Journal of Business 45, 444-454.

Christie,W.G., Huang ,R.D., (1995). Following the Pied Piper: Do individual Returns Herd around the Market . Financial Analyst Journal.

Chang, E.C., Cheng, J.W., Khorana, A., (2000), An Examination of Herd Behavior in Equity Markets: An International Perspective, Journal of Banking and Finance 24, 1651-1679.

Demirer, R. and Kutan, A. M., (2006), “Does herding behavior exist in Chinese stock market?” Journal of International Financial Markets, Institutions and Money, 16, 123-142.

Devenow, A., Welch, I., (1996), Rational herding in financial economics, European Economic Review 40, 603–615.

Gleason, K.C., Mathur, I, Peterson, M.A., 2004, Analysis of Intraday Herding Behavior among the Sector ETFs, Journal of Empirical Finance 11, 681-694.

Hwang S., Salmon. M. (2004). Market Stress and Herding. Journal of Empirical Finance , 585-616. LIn Tan, Chiang. T, Mason, J and Nelling, E. (2007). Herding Behavior in Chinese Stock Markets:An examination of A and B shares. Pacific- Basin Finance Journal Volume 16, Issues 1-2, January 2008, Pages 61-77. McQueen, G., M. A. Pinegar, and S. Thorley, 1996, Delayed reaction to good news and the cross autocorrelation of portfolio returns, Journal of Finance 51, 889-919.

Scharfstein, D.S., Stein, J.C., (1990), Herd Behavior and Investment, American Economic Review 80, 465-479.

Wermers, R., (1999), Mutual Fund Herding and the Impact on Stock Prices, Journal of Finance 54, 581-622.