Abstract
This paper examines the impact of herding behaviour on the expected return in the Egyptian Stock Exchange by adding an additional risk factor reflecting herding behaviour to the capital asset pricing model. The study used monthly excess stock returns of 50 stocks listed on the Egyptian Stock Exchange from January 2014 to December 2018. The results do not support the capital asset pricing model before and after adding the herding behaviour factor, therefore there is no effect of herding behaviour on the expected return.
Highlights
Efficient Market Hypothesis (EMH) and behavioral finance have been the cause of much controversy for decades, where one of them defending markets efficiency and the other opposing it
We will identify the impact of one of the most important factors of behavioral finance is the herding behavior on the expected return in the Egyptian Stock Exchange (EGX) by adding an additional risk factor reflecting herding behaviour to the the Capital Asset Pricing Model (CAPM) model, where the CAPM model will be tested in its original form and re-tested after adding the additional risk factor from January 2014 to December 2018, in order to know the effect of herding on the expected return in the Egyptian stock exchange
The coefficient is insignificant and equal to zero with a t-statistics equal (0.961), the results do not support the CAPM after adding the herding factor, there is no effect of herding behaviour on the expected return in the EGX
Summary
Efficient Market Hypothesis (EMH) and behavioral finance have been the cause of much controversy for decades, where one of them defending markets efficiency and the other opposing it. The field of financial modeling is one of the most important fields in the theory of modern finance, which examines the relationship between return and risk; there have been many developments in this field since the introduction of the portfolio. The most important of these models is the Capital Asset Pricing Model (CAPM), which presented by Sharpe (1964) and Lintner (1965) and developed on the basis of portfolio theory by Harry. The CAPM model is considered the first capital asset pricing model to explain the relationship between the return of any asset and the risks arising from the investment in these assets. We will identify the impact of one of the most important factors of behavioral finance is the herding behavior on the expected return in the Egyptian Stock Exchange (EGX) by adding an additional risk factor reflecting herding behaviour (hmt) to the the CAPM model, where the CAPM model will be tested in its original form and re-tested after adding the additional risk factor from January 2014 to December 2018, in order to know the effect of herding on the expected return in the Egyptian stock exchange
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