Herding behavior in Islamic GCC stock market: a daily analysis

Abstract

PurposeThis paper aims to examine the presence of herd behaviour in the Islamic Gulf Cooperation Council (GCC) stock markets following the methodology given by Chiang and Zheng (2010). Generalized auto regressive conditional heteroskedasticity (GARCH)-type models and quantile regression analysis are used and applied to daily data ranging from 3 January 2010 to 28 July 2016. Results show evidence of herd behaviour in the GCC stock markets. When the data are divided into down and up market periods, herd information is found to be statistically significant and negative during upward market periods only. These results are similar to those reported in some emerging markets such as China, Japan and Hong Kong, where stock returns perform more similarly during down market periods and differently during rising markets.Design/methodology/approachThe authors present a brief literature on herd behaviour. Second, the authors provide some specificity of the GCC Islamic stock market, followed by the presentation of the methodology and the data, results and their interpretation.FindingsThe authors take into account the difference existing in market conditions and find evidence of herding behaviour during rising markets only for GCC markets. This result was confirmed after using the quantile regression method, as evidence of herding was observed only in highly extreme periods. Stock returns perform more similarly when market is down in Islamic GCC stock market.Research limitations/implicationsThe research limitation consists in the fact that this work can be extended to compare the GCC stock markets with other markets in Asia such as Malaysia and Indonesia.Practical implicationsThe principal implication consists in the fact that herding behaviour is limited in the GCC markets and Islamic finance can have an important contribution to moderate the behaviour in the financial markets.Social implicationsThe work focusses on the role of ethics in the financial markets and their ability to reduce the impact of behavioural biases.Originality/valueThe paper studies the behaviour of investors in the Islamic financial markets and gives an idea about the importance of the behaviour in this particular market regarding its characteristics.