Abstract
This study investigates the behavioural bias of market-wide herding in the Indian equity market during the spread of COVID-19 pandemic. The study also examines the impact of market volatility and government response on herding during the sample period. We use the measure of cross-sectional absolute deviation and semi-parametric estimator of quantile regression for the period 1 January 2020 till 15 June 2020 for S&P CNX Nifty Index and its 50 constituent companies. The results obtained reveal significant herding in the Indian equity market that is aggravated by market volatility. Further, we find that the government response and control measures implemented are successful in reducing herd behaviour. The research calls for better information disclosure guidelines to promote market efficiency. We further suggest that during exogenous events, investors need to realign their portfolios and formulate trading strategies for better risk-return management.
Highlights
The spread of COVID-19 is a rare event like a ‘black swan’ (Yarovaya et al, 2020) that has impacted the economic cycles and financial markets causing reduced business investments (Fan, 2003) and inducing massive sale of risky assets (Baker et al, 2020; Ramelli & Wagner, 2020)
Our results provide evidence of significant herding in the Indian equity market during the period of study that is exasperated by panic and fear (Kim & Wei, 2002), higher uncertainty and information asymmetry (Yousaf et al, 2018) about the spread of the pandemic and recovery thereafter that affects asset prices and trading behaviour (Epstein & Schneider, 2008)
We study the impact of volatility and government stringency measures on herd behaviour during the outbreak of COVID-19 pandemic
Summary
The spread of COVID-19 is a rare event like a ‘black swan’ (Yarovaya et al, 2020) that has impacted the economic cycles and financial markets causing reduced business investments (Fan, 2003) and inducing massive sale of risky assets (Baker et al, 2020; Ramelli & Wagner, 2020). The scarce and limited information on a disease that is so contagious and fatal has engulfed the economy and financial markets with fear and anxiety (Bloom et al, 2018). This makes the investors vulnerable to stress and shocks as they succumb to pessimism resulting in panic trading (Baker et al, 2012). The collective social anxiety makes the investors follow the crowd, manifesting herd behaviour
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