An examination of herding behavior in Pakistani stock market. Issue 3 (20th July 2015)

• Record Type: Journal Article
• Authors: Javaira, Zuee; Hassan, Arshad
• Is Part Of: International journal of emerging markets. Volume 10:Issue 3(2015)
• Page Start: 474
• Page End: 490
• Publication Date: 2015-07-20
• Subjects: Business enterprises -- Finance -- Periodicals; Investments -- Developing countries -- Periodicals; Commerce -- Periodicals; Developing countries -- Economic conditions -- Periodicals; 330.91724
• DOI: 10.1108/IJoEM-07-2011-0064
• Languages: English
• ISSNs: 1746-8809

Abstract

<abstract> <title> <x content-type="archive" xml:space="preserve">Abstract</x> </title> <sec> <title content-type="abstract-heading">Purpose</title> <p> – The purpose of this paper is to examine the investment behavior of Pakistani stock market participants, specifically with respect to their tendency to exhibit herd behavior. </p> </sec> <sec> <title content-type="abstract-heading">Design/methodology/approach</title> <p> – The study employed two different methodologies suggested by Christie and Huang (1995) and Chang <italic>et al.</italic> (2000) to test herd formation. Results are based on daily and monthly stock of KSE-100 index for the period 2002-2007. </p> </sec> <sec> <title content-type="abstract-heading">Findings</title> <p> – Results based on daily and monthly stock data from Karachi Stock Exchange indicate the non-existence of herd behavior for the period 2002-2007 and find no support for the rational asset pricing model and investor behavior found inefficient. This study denied proved evidence of herding due to market return asymmetry, high and low trading volume states and asymmetric market volatility. Macroeconomic fundamentals have insignificant role in decision-making process of investor therefore has no impact on herding behavior. However, during liquidity crisis of March 2005, Pakistani stock market exhibit herding behavior due to asymmetry of information among investors, presence of speculator and questionable badla financing-local leverage financing mechanism. </p> </sec> <sec> <title content-type="abstract-heading">Research limitations/implications</title> <p> – In future, this study can be improved by employing stock returns portfolios based on market capitalization or sector wise portfolio returns from KSE-100. Furthermore by identifying those factors that cause market to be overall inefficient and define the pattern of the investor trading activities. </p> </sec> <sec> <title content-type="abstract-heading">Practical implications</title> <p> – For an accurate valuation of assets investors should incorporate the herding factor. </p> </sec> <sec> <title content-type="abstract-heading">Social implications</title> <p> – As the assets are mispriced, investor behavior is uncertain and markets are inefficient, foreign investors should invest with caution, as large numbers of securities are needed to achieve the same level of diversification than in an otherwise normal market. </p> </sec> <sec> <title content-type="abstract-heading">Originality/value</title> <p> – In Karachi Stock Exchange, it is first attempt to uncover the herding behavior. This paper contribute to the body of knowledge by investigating the herding behavior in the emerging markets since most of the previous study concentrate more on the developed markets. Furthermore, the study also analyzed the herding behavior in different economic condition and includes economic variables and examines asymmetric effect. This study presents an integrated model to test herding behavior in Pakistani equity market. Consideration of said behavioral effect in the decision-making process of investor will make the decisions more rational and optimal.</p> </sec> </abstract>