The IUP Journal of Applied Finance
Exploring the Herd Behavior of Investors: A Comparative Study of the Indian and US Stock Markets

Article Details
Pub. Date : Oct, 2020
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF31020
Author Name : Shilpa Lodha and G Soral
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 12

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Abstract

Recent research has witnessed a major shift in financial studies—from traditional finance to behavioral finance. The rejection of Efficient Market Hypothesis (EMH), several times, has led to a new era of financial studies. Herd behavior is one of the major areas of behavioral finance. Herding, basically, implies trading by a large group of investors in the same direction over a period of time. The present paper attempts to explore the existence of herd behavior in the Indian and the US stock markets. Daily prices of Nifty, its 50 constituent stocks, Dow Jones Industrial Average (DJIA) and its 30 constituent stocks are collected for five financial years from 2013-14 to 2017-18. Using Cross- Sectional Absolute Deviation (CSAD), as proposed by Chiang and Zheng (2010), the paper attempts to explore the existence of herd behavior in the Indian and the US stock markets and the impact of US markets on the herd behavior of the Indian stock markets. The results reveal that investors did not exhibit herd behavior both in the Indian and US stock markets during the study period. Even after accounting for asymmetric returns, herding is indicated by both the markets. Further, inclusion of CSAD of DJIA as an explanatory variable shows that Indian investors do not herd with US stock markets.


Description

Stock market returns and their driving forces have been the key area of research in finance. When one splits these studies on the basis of behavior of market participants, broadly there are two different schools of thought. One is the traditional finance which is largely based on the seminal work of Fama (1970), i.e., Efficient Market Hypothesis (EMH). It is based on the rational behavior assumption to be demonstrated by investors. In other words, the EMH assumes that investors are rational and behave accordingly. Recently, there were numerous research studies challenging the EMH directly and here comes into picture various anomalies of stock markets. Various anomalies are attributed to calendar, i.e., calendar-based anomalies like day-of-the-week effect, month-of-the-year effect, holiday effects, etc. Another stream of anomalies is related with investors’ behavior. Thus behavioral finance is another pole of research in finance.

Behavioral finance encompasses four major areas of bias investment decisions—mental accounting, herd behavior, anchoring and high self-rating. Mental accounting was first introduced by Thaler (1984), “All organizations from General Motors down to single person households, have explicit and/or implicit accounting systems. The accounting systems often


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