Herding Behavior in Karachi Stock Exchange

Author(s)

Tariq Javed , Nousheen Zafar , Bilal Hafeez ,

Download Full PDF Pages: 19-28 | Views: 501 | Downloads: 107 | DOI: 10.5281/zenodo.3404584

Volume 2 - February 2013 (02)

Abstract

This study aims at examining the existence of herding behavior of investors in Pakistani stock market. KSE 100 is selected as a sample for the study as it represents almost 86% of Karachi Stock Exchange. Monthly data for companies has been gathered for analysis. Results obtained fail to find any evidence of herding in Karachi stock exchange with significantly positive values for dichotomous variables representing extreme market conditions. Similarly the value for squared market returns is also found negative but insignificant. The study concludes that Herding behavior does not exist in Karachi Stock Exchange analyzing monthly returns data. 

Keywords

Herding, propagated, frailty, instability, Noise traders, cross sectional standard deviation, cross sectional absolute deviation, efficient market hypothesis, volatility

References

                   i.            Avery, C. and P. Zemsky. (1998). Multidimensional uncertainty and herd behavior in financial markets. American Economic Review, 88, 724-748.

       ii.            Banerjee, Abhijit, 1992, “A Simple Model of Herd Behavior,” Quarterly Journal of Economics, Vol. 107, pp. 797–818.

     iii.            Barberis and Thaler. (2003). A survey of behavioral finance , Handbook of the Economics of Finance, G. Constantinides, R. Stulz, M. Harris eds., North Holland, Amsterdam.

     iv.            Barberis, N. and A. Shleifer, 2003, “Style Investing,” Journal of Financial Economics 68, 161- 199.

       v.            Belhoula, M and Naoui, K (2011) Herding and Positive Feedback Trading in American Stock Market: A Two Co-directional Behavior of Investors, International Journal of Business and Management Vol. 6, No. 9, 244 - 252.

     vi.            Bernhard, Dan, Campello, Murillo, and Edward Kutsoati, 2006, Who herds?, Journal of Financial Economics80, 657-675.

    vii.            Biais, B., Hilton, D., Mazurier, K., and Pouget. (2000). Psychological traits and trading strategies, May 2000, Toulouse University.

  viii.            Bikhchandani, S. and Sharma, S. (2000) Herd behavior in financial markets, IMF Staff Papers, 47, 279–311. Bikhchandani, S. and Sharma, S. (2001) Herd behavior in financial markets, IMF Staff Papers, 47, No.3 279–311.

      ix.            Bikhchandani, S., Hirshleifer, D., and I., Welch, (1992), A theory of fads, fashion, custom and cultural change as informational cascades, Journal of Political Economy100, 992-1026.

       x.            Bikhchandani, S., Sharma. (2000). Herd behavior in financial markets: a review. MF Working Paper WP/00/48 (International Monetary Fund, Washington).

      xi.            Bornstein, E. & Gaston, R. (2003) “A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds,” International Monetary Fund,vol. 50, p. 43- 63.

    xii.            Caparrelli, F., A. M. D’Arcangelis and A. Cassuto.(2004). Herding in the Italian stock market: A Case of Behavior Finance.Journal of Behavioral Finance, 5(4), 222-230.

  xiii.            Chang, E., Cheng, J. and A. Khorana. (2000). An examination of herd behavior in equity markets: an international perspective. Journal of Banking and Finance, 24(10), 1651-1679.

  xiv.            Chen, Q., and W., Jiang, 2006, Analysts’weighting of private and public information, Review of Financial Studies19, 319–355.

    xv.            Christie, William G., and Roger D. Huang, 1995, “Following the Pied Piper: Do Individual Returns Herd Around the Market?,” Financial Analysts Journal,July-August, pp. 31–37.

  xvi.            Clement, Michael B., and Senyo Tse, 2005, Financial analyst characteristics and herding behavior in forecasting, The Journal of Finance60, 307-342.

 xvii.            De Long, J. B., Shleifer, A., Summers, L. H. & Waldmann, R. J.(1990) “Noise Trader Risk in Financial Markets,” Journal of Political Economy, vol. 98, p. 703-738.

xviii.            Del Guercio, D., 1996, “The Distorting Effectof the Prudent-man Laws on Institutional Equity Investment,” Journal of Financial Economics, 40, 31-62.

  xix.            Demirer, R., & Kutan, A.M. (2006). Does herding behavior exist in chinese stock markets?. Journal of International Financial Markets, Institutions and Money16, pp.123–142.

    xx.            Dreman, D., 1979, “Contrarian Investment Strategy: The Psychology of Stock Market Success,” Random House, N.Y.

  xxi.            Falkenstein, E.G., 1996, “Preferences for Stock Characteristics as Revealed by Mutual Fund Portfolio Holdings,” Journal of Finance, 51,111- 135.

 xxii.            Friedman, B.M., 1984, “A Comment: Stock Prices and Social Dynamics,” Brookings Papers on Economic Activity, 2, 504-508

xxiii.            Froot, A, Kenneth, David S. Scharfestein, and Jeremy Stein, 1992, “Herd on the Street: Informational Inefficiencies in a Market with ShortTerm Speculation,” Journal of finance, 47, 1461- 1484.

xxiv.            Gleason, K., Mathur, I. and M. Peterson. (2004). Analysis of intraday herding behavior among the sector ETFs’. Journal of Empirical Finance, 11, 681-694.

 xxv.            Gleason, K.C., Mathur, I., & Peterson, M.A. (2004). Analysis of intraday herding behavior among the sector ETFs. Journal of Empirical Finance,11, pp. 681- 694.

xxvi.            Gompers, P. and A. Metrick, 2001, “Institutional Investors and Equity Prices,” Quarterly Journal of Economics, 116, 229-260

xxvii.            Graham, John R., 1999, “Herding among Investment Newsletters: Theory and Evidence,” Journal of Finance, 54, pp. 237–68.

xxviii.            Henker, J., Henker, T .and A. Mitsios. (2006). Doinvestors herd intraday in Australian equities?. International Journal of Managerial Finance, 2(3), 196-219

xxix.            Hirshleifer D., A. Subrahmanyam, and Sheridan Titman, 1994, “Security Analysis and Trading Patterns When Some Investors Receive Information Before Others,” Journal of Finance, 49, 1665-1698.

 xxx.            Hirshleifer. (2001). Investor psychology and asset pricing. Journal of Finance, 64, pp. 1533–1597.

xxxi.            Hong, H., Kubik, D. and Solomon, A. (2000) Security analysts’ career concerns and herding of earnings forecasts, RAND Journal of Economics, 31, 121–44.

xxxii.            Jegadeesh, N., Kim, J., Krische, S. D. and Lee, C. M. C. (2004) Analyzing the analysts: when do recommenda-tions add value?, Journal of Finance, 59, 1083–124.

xxxiii.            Kultti, K. and P. Miettinen. (2006). Herding with costly information. International Game Theory Review,8(1), 21-31.

xxxiv.            Lakonishok, Josef, Andrei Shleifer and Robert W. Vishny, 1992, “The Impact of Institutional Trading on Stock Prices,” Journal of Financial Economics, 312, 23-43.

xxxv.            Nofsinger, J. R. & Sias, R. W.(1999) “Herding and Feedback Trading by Institutional and Individual Investors,” Journal of Finance, vol. 54, p. 2263- 2295.

xxxvi.            O’Hara, M. (1995). Market Microstructure Theory. Blackwell Publishers, Oxford, U.K.

xxxvii.            Odean, T. (1998). Volume, Volatility, Price and Profit when All Traders are Above Average.The Journal of Finance, Vol LIII, No. 6, 1887-1934.

xxxviii.            Persaud, Avinash, 2000, “Sending the Herd Off the Cliff Edge: The Disturbing Interaction Between Herding and Market-Sensitive Risk Management Practices,”in Jacques de Larosiere Essays on Global Finance, (Washington: Institute of International Finance).

xxxix.            Pirinsky, C., 2002, “Herding and Contrarian Trading of Institutional Investors,” Working Paper, Texas A&M University.

      xl.            Prechter, R. and W. Parker. (2007). The financial/economic dichotomy in social behavioral dynamics: socionomic perspective. Journal of Behavioral Finance, 8(2), 84-108.

    xli.            Scharfstein, David and Jeremy Stein, 1990, “Herd Behavior and Investment,” American Economic Review, 80, 465-479

  xlii.            Sias, Richard, W., “Institutional Herding,” 2003, Forthcoming, Review of Financial Studies.

xliii.            Sharma, V (2004), "Two Essays on Herding in Financial Markets", Dissertaiton, State University

 xliv.            Szyszka Adam. (2008). From the efficient market Hypothesis to Behavioral Finance: How investors’ psychology change the vision of financial market, Working paper Poland University of Economics.

  xlv.            Tan, L., Chiang, T. C., Mason, J. R., and Nelling, E. (2008). Herding behavior in Chinese stock markets: An examination of A and B shares. Pacific-Basin Finance Journal, 16, pp. 61–77

 xlvi.            Tversky, A., and D. Kahneman. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185, pp.1124–1131.

xlvii.            Tversky, A., and D. Kahneman. (1979). Prospect theory: An analysis of decisions under risk. Econometrica, 12, pp. 13-32.

xlviii.            Welch, I., 1992, Sequential sales, learning and cascades, The Journal of Finance47, 695-732.

 xlix.            Wermers, R., 1999, “Mutual Fund Trading and the Impact on Stock Prices,” Journal of Finance, 54, 581-622.

         l.            Wermers, Russ, 1999, “Mutual Fund Herding and the Impact on Stock Prices,” Journal of Finance,Vol. 54, pp. 581–622.

       li.            Zitzewitz, E., 2001, Measuring herding and exaggeration by equity analysts, Working paper, Stanford University, Graduate School of Business.

Cite this Article: