Shifts in Herd Mentality of Investors in Uncertain Market Conditions: New Evidence in the Context of a Frontier Stock Market
Abstract
This paper examines the herding phenomenon in the context of a frontier stock market, the Colombo Stock Exchange of Sri Lanka, employing the cross - sectional absolute deviation methodology to daily frequencies of data for the period from April, 2000 to September, 2016. The results show significant changes in magnitude and pattern of herding over different episodes of the market. The herd behavior is strongly presence irrespective of the direction of the market movement in the 2000 - 2008 period, during which investments in the stock market is affected by the country’s political instability resulting from the civil war. The evidence also shows herd behavior during the period of market bubble whereas negative herding in the market crash period. However, it becomes less likely to occur during the period after the market crash. The lower tendency to herd during the post- market crash period supports the Adaptive Market Hypothesis, implying that investors are likely to realize the irrationality of herding and learn to be more rational as a consequence of significant losses experienced during the period of the market crash. Accordingly, these findings suggest that period- specific characteristics of the market and the associated psychological effects to investors such as overconfidence and panics would cause changes to their beliefs and behavior, the experiences of which would subsequently produce learning effect to minimize their irrationality in decision making.
Downloads
References
Bekiros, S., Jlassi, M., Lucey, B., Naoui, K. & Uddin, G. S. (2017). Herding behavior, market sentiment and volatility: Will the bubble resume? The North American Journal of Economics and Finance, 42, 107 131. Bikhchandani, S., Hirshleifer, D. & Welch, I. (1992). A theory of fads, fashion, custom, and cultural change as informational cascades. Journal of political Economy, 100(5), 992 - 1026. Bradbury, M. A., Hens, T. & Zeisberger, S. (2014). Improving investment decisions with simulated experience. Review of Finance , 19(3), 1019 - 1052. Buchinsky, M. (1995). Estimating the asymptotic covariance matrix for quantile regression models a Monte Carlo study. Journal of Econometrics, 68(2), 303 - 338. Cade, B. S. & Noon, B. R. (2003). A gentle introduction to quantile regression for ecologists. Frontiers in Ecology and the Environment, 1(8), 412 - 420. Chang, E. C., Cheng, J. W. & Khorana, A. (2000). An examination of herd behavior in equity markets: An international perspective. Journal of Banking & Finance, 24(10), 1651 - 1679. Chen, C. & Wei, Y. (2005). Computational issues for quantile regression. SankhyÄ: The Indian Journal of Statistics, 67, 399 - 41 7. Chiang, T. C., Li, J. & Tan, L. (2010). Empirical investigation of herding behavior in Chinese stock markets: Evidence from quantile regression analysis. Global Finance Journal, 21(1), 111 - 124. Chiang, T. C. & Zheng, D. (2010). An empirical analysis of herd behavior in global stock markets. Journal of Banking & Finance, 34(8), 1911 - 1921. Christie, W. G. & Huang, R. D. (1995). Following the pied piper: Do individual returns herd around the market? Financial Analysts Journal, 51(4), 31 - 37. Clements, A., Hurn, S. & Shi, S. (2017). An empirical investigation of herding in the US stock market. Economic Modelling, 67, 184 - 192.
Dang, H. V. & Lin, M. (2016). Herd mentality in the stock market: On the role of idiosyncratic participants with heterogeneous information. International Review of Financial Analysis, 48, 247 - 260. Dhar, R. & Zhu, N. (2006). Up close and personal: Investor sophistication and the disposition effect. Management Science, 52(5), 726 - 740. Economou, F., Gavriilidis, K., Kallinterakis, V. & Yordanov, N. (2015). Do fund managers herd in frontier markets —and why? International Review of Financial Analysis, 40, 76 - 87. Economou, F., Kostakis, A. & Philippas, N. (2011). Cross - country effects in herding behaviour: Evidence from four south European markets. Journal of International Financial Markets, Institutions and Money, 21(3), 443 - 460. Feng, L. & Seasholes, M. S. (2005). Do investor sophistication and trading experience eliminate behavioral biases in financial markets? Review of Finance, 9(3), 305 - 351. Focardi, S., Cincotti, S. & Marchesi, M. (2002). Self- organization and market crashes. Journal of Economic Behavior & Organization, 49(2), 241 - 267. Galariotis, E. C., Rong, W. & Spyrou, S. I. (2015). Herding on fundamental information: A comparative study. Journal of Banking and Finance, 50, 589 - 598. Gavriilidis, K., Kallinterakis, V. & Ferreira, M. P. L. (2013). Institutional industry herding: Intentional or spurious? Journal of International Financial Markets, Institutions and Money, 26, 192 - 214. Gębka, B. & Wohar, M. E. (2013). International herding: Does it differ across sectors? Journal of International Financial Markets, Institutions and Money, 23, 55 - 84. Gervais, S. & Odean, T. (2001). Learning to be overconfident. the Review of financial studies, 14(1), 1 - 27. Guney, Y., Kallinterakis, V. & Komba, G. (2017). Herding in frontier markets: Evidence from African stock exchanges. Journal of International Financial Markets, Institutions and Money, 47, 152 - 175. Holmes, P., Kallinterakis, V. & Ferreira, M. (2013). Herding in a concentrated market: a question of intent. European Financial Management, 19(3), 497 - 520. Itzkowitz, J. & Itzkowitz, J. (2017). Name- Based Behavioral Biases: Are Expert Investors Immune? Journal of Behavioral Finance, 18(2), 180 - 188. Klein, A. C. (2013). Time-variations in herding behavior: Evidence from a Markov switching SUR model. Journal of International Financial Markets, Institutions and Money, 26, 291 - 304. Kocherginsky, M., He, X. & Mu, Y. (2005). Practical confidence intervals for regression quantiles. Journal of Computational and Graphical Statistics, 14(1), 41 - 55. Koenker, R. (1994). Confidence intervals for regression quantiles. Paper presented at the 5th Prague Symposium on Asymptotic statistics, 349 - 359. Koenker, R. & Bassett, J. G. (1978). Regression quantiles . Econometrica, 46(1), 33 - 50. Koenker, R. & Hallock, K. (2000). Quantile regression: An introduction. Journal of Economic Perspectives, 15(4), 43 - 56. List, J. A. (2011). Does market experience eliminate market anomalies? The case of exogenous market experience. American Economic Review, 101(3), 313 - 317. Lo, A. W. (2004). The adaptive markets hypothesis. The Journal of Portfolio Management, 30(5), 15 - 29. Lo, A. W. (2005). Reconciling efficient markets with behavioral finance: the adaptive markets hypothesis. Journal of Investment Consulting, 7, 21 - 44. Lo, A. W. (2012). Adaptive Markets and the New World Order. Financial Analysts Journal, 68(2), 18 - 29. Lux, T. (1995). Herd behaviour, bubbles and crashes. The economic journal, 105, 881 - 896. Machado, J. A. & Silva, J. (2013). Quantile regression and heteroskedasticity. Unpublished manuscrip, Department of Economics, University of Essex. Retrieved from https://jmcss.som.surrey.ac.uk/JM_JSS.pdf Newey, W. K. & West, K. D. (1987). A simple, positive semi- definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica, 55, 703 - 708. Nicolosi, G., Peng, L. & Zhu, N. (2009). Do individual investors learn from their trading experience? Journal of Financial Markets, 12(2), 317 - 336. Seru, A., Shumway, T. & Stoffman, N. (2009). Learning by trading. the Review of financial studies, 23(2), 705 739. Sewwandi, W. G. T. (2016). Herding in Colombo Stock Exchange. EPRA International Journal of Multidisciplinary Research, 2(3), 182 - 186. Tan, L., Chiang, T. C., Mason, J. R. & Nelling, E. (2008). Herding behavior in Chinese stock markets: An examination of A and B shares. Pacific-Basin Finance Journal, 16(1), 61 - 77.
Vo, X. V. & Phan, D. B. A. (2016). Herd Behavior in Emerging Equity Markets: Evidence from Vietnam. Asian Journal of Law and Economics, 7(3), 369 - 383. Wilcox, R. R. (2010). Fundamentals of modern statistical methods: Substantially improving power and accuracy: Springer Science & Business Media. Xiao, Z. (2012). Time series quantile regressions. In S. R. T. Rao, & C. Rao (Ed.), Handbook of statistics, time series analysis: Methods and applications, 30, 213 - 257. Xiaofang, C. & Shantha, K. V. A. (2017). Empirical Study on Herding Behavior in Sri Lankan Stock Market: Evidence from Quantile Regression Approach (1040 - 1045). Paper presented at the 14th International Conference on Innovation and Management (1040 - 1045). Wuhan, China: Wuhan University of Technology Press. Zhou, J. & Anderson, R. I. (2013). An empirical investigation of herding behavior in the US REIT market. The Journal of Real Estate Finance and Economics, 47(1), 83 - 108.
Copyright (c) 2018 Kalugala Vidanalage Aruna Shantha
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of a revised paper in the light of suggestions of the reviewers, editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.
