Abstract
This paper investigates herding behavior and the connection between herding behavior and investor sentiment. We apply a Cross-Sectional Absolute Deviation (CSAD) approach and the quantile regression method to capture herding behavior in the KOSPI and KOSDAQ stock markets. The analysis results are outlined as follows. First, we find that herding behavior is exhibited during down-market periods in the KOSPI and KOSDAQ stock markets. However, we show that adverse herding behavior occurs in low-trading volume and low-volatility periods. Second, according to the results of the quantile regression, herding behavior is found in the low and high quantiles of the KOSPI and KOSDAQ stock markets. However, adverse herding behavior is also found, which means that investors herd in extreme market conditions. Third, the relationship between investor sentiment and herding behavior is analyzed through regression and quantile regression, and investor sentiment is confirmed to be one of the important factors that can cause herding behavior in the Korean stock market.
Highlights
Understanding the decision-making process of market participants in the stock market and how investor behavior patterns affect stock prices is important for both business and academia
The estimated coefficient (β3) is positive, which means that reverse herding behavior occurs when investors are pessimistic about the future in the KOSDAQ stock market
This study analyzed the existence of herding behavior and the relationship between herding behavior and investor sentiment in the KOSPI and KOSDAQ stock markets
Summary
Understanding the decision-making process of market participants in the stock market and how investor behavior patterns affect stock prices is important for both business and academia. It is known that there are various cognitive biases and flaws, such as human error, in the trading process in financial markets. Investors follow market sentiment or rely heavily on other investment actions and act to sell or buy. This is called “herding behavior,” which means that people are imitating each other. This phenomenon was seen during the 2000–2002 IT bubble and the 2007–2008 global financial crisis
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