Cross-sectional Absolute Deviation Research Articles

The herding behaviour on Pakistan stock exchange – using firm-level data

This paper analyses herding behaviour in the Pakistan stock exchange (PSX, formerly known as Karachi stock exchange, KSE) for a sample of 663 firms over a period of 13 years, from 2004 to 2017. For detecting herding behaviour, two dependent variables are used, i.e., cross-sectional standard deviation (CSSD) of Christie and Huang (1995) and cross-sectional absolute deviation (CSAD) of Chang et al. (2000). The results show no herding behaviour on the basis of both methods at different levels of market movements. The absence of the herding behaviour may be because these firms belong to different sectors which may follow their respective industry portfolios but not the overall market; for example, Shah et al. (2017) documented that firms in several industries herd toward their industry portfolios for Pakistani data. Future research can be done using a primary data collection method from investors about their opinion on herding behaviour.

Does herding behavior exist in cryptocurrency market?

This paper investigates the existence of herding behavior in cryptocurrencies market. Using data of the 20 large cryptocurrencies and MV Index Solution Crypto Compare Digital Assets for large cap index, we found no evidence of herding behavior using cross-sectional absolute standard deviation estimation. However, by applying a rolling window analysis, the results show significant herding behavior, which varies over time. Finally, we find an inverse relationship between herding behavior and the Bloomberg consumer comfort index which means that when traders are less comfortable they prefer to ignore their expectations and follow the market performance.

Herding in mutual funds: A complex network approach

The paper investigates herding in mutual funds through a complex networks approach. The detection of significant correlation coefficients constitutes the basis for the construction of the network. Some centrality measures and the assortativity are added as explanatory variables in the regression analysis of two popular indicators of herding, largely applied in finance literature. Cross-Sectional Standard Deviation and Cross-Sectional Absolute Deviation are both considered since they emphasize the bulk and the extreme values of herding. Two dummy variables designed to capture differences in investor behaviour in extreme up or down versus relatively normal markets are considered as independent variables. The results show a clear decrease of herding in stressful periods of the market. Moreover, the prevailing explanatory power of the betweenness is well evidenced, thereby highlighting the role of the network structure. In line with the literature on herding, the results also evidence a flight to safety effect.

HERDING BEHAVIOR IN THE INDONESIAN ISLAMIC STOCK MARKET

Indonesia Stock Exchange provides Islamic stocks for Muslim investors who want toinvest, with the first Islamic stock index in Indonesia being Jakarta Islamic Index or JIIthat consists of thirty of the most liquid Islamic stocks. The market capitalization of JIItends to increase every year. This paper examines the presence of herding behavior inemerging Islamic stock market of Indonesia using daily return of Indonesia CompositeIndex and JII from October 6, 2000 to October 5, 2018. Herding behavior could generallytrigger shifting market prices from equilibrium values. Herding behavior may beidentified from the relation between stock return dispersion and market return. Stockreturn dispersion is measured using Cross Sectional Absolute Deviation or CSAD.Generalized Auto Regressive Conditional Heteroskedasticity or GARCH method isused to detect herding behavior. GARCH does not see heteroskedasticity as a problem,instead uses it to make a model. The result indicates that herding behavior exist inIslamic stock market of Indonesia. Asymmetric herding occurs in Indonesia Islamicstock market where herding behavior exists during falling market condition only.

Ponašanje gomile na tržištu kriptovalute - stvarno vs lažno gomilanje

This paper sets out to explore whether the investor herding in the cryptocurrency market induces correlations in cryptocurrency returns using the methodology of Chang et al. (2000) and Galariotis et al. (2015) from a daily data sampling period of 3/30/2015 to 5/24/2019. The initial regression results show that the cross-sectional absolute deviation of return can only be explained by GSCI oil and gold index return, but no relationship exists between cross-sectional absolute deviation of return and other regression variables, such as return on CCi30, US equity risk premium and US/Euro exchange rate return. The herding regression results under normal market condition show that a strong tendency exists to herd on non-fundamental information that explains cross-sectional absolute deviation of returns. As such, cryptocurrency returns cannot be predicted on the basis of fundamental economic information (e.g., major macroeconomic announcements). Herding on non-fundamental information is found to be more pronounced during an upward-trending period of the market and other than upward-trending period. No signs of herding on fundamental information could be observed under other market conditions. Although the theory suggests that herding on non-fundamental information results in more efficient outcomes, the above findings do not encourage the diversification of traditional assets with cryptocurrency on the basis of low correlation. Since cryptocurrency lacks intrinsic value, the exchange is shown to provide a pseudo-efficient trading platform for speculative investors. Implications for future research are discussed.

The evolution of herd behavior: Will herding disappear over time?

PurposeThe purpose of this paper is to examine the evolutionary nature of herding phenomenon in the context of a frontier stock market, the Colombo Stock Exchange of Sri Lanka.Design/methodology/approachThis study applies the cross-sectional absolute deviation methodology for daily frequencies of data of all the common stocks listed during the period from April 2000 to March 2018. The regression coefficients are estimated by using both the ordinary least square and the quantile regression procedures.FindingsThe findings reveal significant changes to the pattern of herding over different market periods, each with specific characteristics. Herding is strongly evident in up and down market days in the 2000-2009 period, during which the market was highly uncertain with the impact of the political instability of the country due to the Civil War on the stock trading. Even after this Civil War period, herd tendency is strongly manifested toward the up market direction as a result of the investors’ optimism about the country’s economy and political stability, which caused to a speculative bubble in the market. After that, it is turned into negative herding due to the panic selling occurred in view of the uncertainty of the inflated prices, which led to a market crash. Notably, herding appears to be consistently absent over the period after the crash, despite the presence of herd motives such as high market uncertainties triggered by political instability and economic crisis during that period.Research limitations/implicationsThe findings suggest that herd behavior is an evolving phenomenon in financial markets. Consistent with the adaptive market hypothesis, the absence of herding evident after the market crash could be attributed to the investors’ learning of the irrationality of herding/negative herding for adapting to market conditions. As a result, herding and negative herding tendencies declined and disappeared at the aggregate market level.Originality/valueThis study contributes to the literature by providing novel evidence on the evolutionary nature of behavioral biases, particularly herding, as predicted by the adaptive market hypothesis. With the application of the quantile regression procedure, in addition to customary used ordinary least squares approach, it also provides robust evidence on this phenomenon.

Consumption on the Internet: Who’s influencing who?

This paper exhibits the results of the experiment that took place at Panteion University of Athens. For the operationalization purposes of the experiment, a web site was constructed that hosted 12 songs from unknown artists, while 196 students participated. The main research question is related to how we decide to consume or decline a cultural product, after getting information about the decisions of the previous participants. Namely, to what extent each successive actor complies with the group behavior after observing their preceding choices and possibly abandons his own private selection. In order to estimate whether this imitation tendency can cause mass consumption phenomena, we used the cross-sectional absolute deviation (Chang et al., 2000) which measures the existence of herding. The decisions of the previous participants in the first experimental group were presented as the impersonal choice of users and in the second as the preferences of the opinion leaders in a network of participants. According to the outcomes of the research the influence of the impersonal mass choice is stronger compared to that of the opinion leaders who failed to cause a phenomenon of high statistical value.

Herding behaviour of Chinese A- and B-share markets

Purpose The purpose of this paper is to examine the evidence of herding phenomenon, spill-over effects related to herding and whether herding is driven by fundamentals or non-fundamentals for various sub-periods and sub-samples. Design/methodology/approach The cross-sectional absolute deviation model is applied to China’s A- and B-share markets in combination with fundamental information. Findings Herding is prevalent on both A- and B-share markets. In detail, investors on A-share market herd for small and growth stock portfolios irrespective of market states while they only herd for large or value stocks in down market, therefore leading the whole herding behaviour to be pronounced in down market. Comparatively, on B-share market, herding is robust for various investment styles (small or large, value or growth) or market situations. Additionally, spill-over effects related to herding do not exist no matter from A-shares to B-shares or from B-shares to A-shares. Moreover, investors on B-share markets tend to herd as the response to non-fundamental information more frequently during financial crisis. Originality/value Investors on A- and B-share markets tend to herd as the response to non-fundamental information more frequently during financial crisis. Analysing the herding behaviours could be helpful in controlling the financial risk.

Analysis on Earnings Persistence, Independent Commissioner and Herding Behavior on Earnings Quality

This study aims at determining the effect of independent commissioners, earnings persistence, and herding behavior on earnings quality. This study employs a multiple linear regression analysis with SPSS as the statistical tool. Before conducting the hypothesis test, a classical assumption test is conducted first, determining whether the data have met the classical assumptions and may be applied to the regression model. There are four components used in the classical assumption test, namely normality test, multicollinearity test, heteroscedasticity test, and autocorrelation test. This study takes 80 qualified manufacturing companies listed with the Indonesia Stock Exchange in 2017 as the object with a purposive sampling technique. The earnings quality variable is measured using ERC, the Herding behavior is measured using Cross Sectional Absolute Deviation (CSAD), the Independent Commissioners are measured by comparing the number of independent commissioners with overall commissioners in the companies, and the earnings persistence is measured by comparing current earnings with past earnings. The results of this study partially show that earnings persistence variable, independent commissioners and herding behavior do not influence the quality of earnings.

Finanças comportamentais: análise dos fatores do efeito manada em empresas listadas na [B

Este trabalho baseou-se na Teoria do Prospecto (Kahneman & Tversky, 1979), sob a ótica da heurística do efeito manada, e teve como objetivo geral investigar a relação entre a crise do subprime, a publicação de notícias e o tamanho da empresa com comportamento manada nas 100 companhias com os maiores volumes de negociações listadas na [B]3 – Brasil Bolsa Balcão, no período de 2007 a 2016. A fim de alcançá-lo, foi utilizado inicialmente como metodologia o modelo de cross-sectional absolute deviation of returns (CSAD), proposto por Chang, Cheng e Khorana (2004), para a identificação da presença do efeito manada. As relações entre as variáveis foram analisadas por meio da regressão do modelo de dados em painel com efeitos fixos e erros-padrão robustos. De maneira geral, os resultados encontrados indicaram a existência de relação positiva entre o comportamento manada, a crise do subprime e a publicação de notícias boas; entretanto, revelou uma relação negativa com o tamanho da empresa. Para a variável Notícias Ruins os resultados não evidenciaram significância estatística (p-valor > 0,26), por isso a hipótese de existência de relação negativa entre o efeito manada e a publicação de notícias ruins foi rejeitada. Diante disso, entende-se que os investidores são influenciados pelas notícias positivas referentes às empresas, e isto tende a gerar neles um comportamento de investimento semelhante ao apresentado pelos grupos maiores de investidores, ou seja, o efeito manada.

The capital flow of stock market studies based on epidemic model with double delays

Herd behaviour, or contagion behaviour, has been proven to exist in the Chinese stock markets. Based on that, this paper seeks to discover the implied mechanism that represents how capital flowed in the market by using an epidemic model. First, we apply the Lyapunov function to prove the locally asymptotical stability and globally asymptotical stability of the epidemic model that is constructed. Second, we use the CSAD (cross-sectional absolute deviation of returns) method to test for the existence of herd behaviour in China’s stock markets. Finally, starting with the risk-free interest rate, we analyse each parameter of the financial epidemic model. We conclude that a case such as the endemic equilibrium (θ>1) exists in the corresponding epidemic model of China’s stock markets, and the local equilibrium and global equilibrium are included. The herd behaviour provides us evidence for further studying the funds’ contagion behaviour. We find that when the effective infectious rate of funds (λ) equals 0.08 (a special economic node), its value corresponds to the capital saturation level (i = 15%). We also find that in the case of normal market fluctuations, the removal rate of funds (γ) ranges from 0.005 to 0.03. In addition, the study of the delay items shows that the first delay item contributes greatly to the stability of the equilibrium point, and thus we can control the size of the delay items with the policy change in order to achieve the purpose of macro-economic regulation. The result of the parameter inversion algorithm has no difference from the simulation results. It shows clearly that the application of the Bayesian neural network on parameter inversion is feasible.

Analysis of Herding Behavior in Moroccan Stock Market

Frontier markets, particularly the Moroccan financial market, are characterized by a narrowness of market, inability to absorb erratic price fluctuations and the low liquidity of securities that encourage investors to herd and imitate those who have all the information about the market. A quantitative research approach was used to analyze the existence of herding n Moroccan stock market. The daily data used in this study concerns the period from 04/01/2010 to 29/12/2017 and contains the daily returns of the MASI and a total of 43 traded stocks. Statistical and econometric methods such as multidimensional scaling and Cross-sectional absolute deviation were used. Subsequently, after the regression models were examined, findings indicated that the first stocks with the highest similarity to the index return are BMCE, BCP, IAM, ATW and CMSR, and the first stocks with the highest dissimilarity are PAP, IBC and SNP, This will have to allow investors to choose profitable alternatives and avoid those that present a possible risk. The results did also show the existence of herding in the Moroccan stock market both upward and downward. This finding was supported by the clear existence of a non-linearity between market performance and CSAD measurement, which confirms the prediction of a non-linear inversion relationship between CSAD and 𝑅𝑚. This could be due to the low level of transparency that prevails in frontier stock exchanges and reduces the quality of their information environment, which leads investors not to react rationally and to draw information from the transactions of their peers.

Herding behavior and contagion in the cryptocurrency market

This study aimed to analyze herding behavior and contagion phenomena in the cryptocurrency market. We selected 50 of the most liquid and capitalized currencies in the period from March 2015 to November 2018 (daily data). The methodology used for detecting herding behavior comprised adaptations of the cross-sectional absolute deviation (CSAD) and cross-sectional standard deviation (CSSD) tests, as well as Hwang and Salmon’s (2004) model. For the contagion effect, we utilized adaptations of Forbes and Rigobon’s (2002) (FR) test, and FR test extensions based on the comoments of Fry, Martin, and Tang (2010) and Fry-McKibbin and Hsiao (2018). The results of using the CSSD test and Hwang and Salmon’s (2004) state space model revealed herding behavior, demonstrating extreme periods of adverse herd behavior. As regards the contagion effect, the modified FR test and its extensions with comoments were able to identify the Bitcoin contagion in other currencies in almost all cases.

Herding behaviour in Indian equity market: a quantile regression approach

This study examines the presence of herding behaviour in the Indian equity market using average daily data from BSE-500 Index stocks for January 2000 to December 2018. The study employs model developed by Chang et al. (2000) using cross sectional absolute deviation of return dispersion as a measure of herding behaviour. The empirical results of OLS regression reveal absence of herding behaviour for pre, during and post crisis period in normal market return and the asymmetric market condition. Similarly, no evidence of herding behaviour is found by examining trading volume and volatility. Further, robustness checked by applying non-parametric techniques of quantile regression, the result remains consistent with OLS findings. Overall, herding behaviour does not prevail in the Indian equity market. The outcome of increased return dispersion may be due to the efficient micro information in the Indian equity market.

Herding behaviour in Indian equity market: a quantile regression approach

This study examines the presence of herding behaviour in the Indian equity market using average daily data from BSE-500 Index stocks for January 2000 to December 2018. The study employs model developed by Chang et al. (2000) using cross sectional absolute deviation of return dispersion as a measure of herding behaviour. The empirical results of OLS regression reveal absence of herding behaviour for pre, during and post crisis period in normal market return and the asymmetric market condition. Similarly, no evidence of herding behaviour is found by examining trading volume and volatility. Further, robustness checked by applying non-parametric techniques of quantile regression, the result remains consistent with OLS findings. Overall, herding behaviour does not prevail in the Indian equity market. The outcome of increased return dispersion may be due to the efficient micro information in the Indian equity market.

Investors’ herding practice: do IFRS and national economic culture matter?

PurposeThe purpose of this paper is to examine the effect of International Financial Reporting Standards (IFRS) and the moderating role of national economic culture on investors’ herding practices in the European Union (EU) equity markets.Design/methodology/approachThe study employs and modify two extensively applied herding measures of cross-sectional standard deviation and cross-sectional absolute deviation, using stock return dispersion as a function of aggregate market return as a proxy for herding behavior. The sample period stretches from January 1, 2001 until December 31, 2015.FindingsThe study finds that mandatory IFRS adoption significantly promotes investors’ herding practice in the EU equity markets. However, taking a further look, the results suggest that the new reporting regime seems not to be the only instigator for the observed herding practice; national economic culture, particularly individualism and masculinity, contribute significantly toward investors’ herd-formation around the mandatory IFRS adoption. Overall, it can be concluded that the notion that the adoption of IFRS improves information-based trading and mitigates irrational investment behavior might totally be inaccurate in some instances. For example, in the case of herding bias, the new reporting regime appears to have promoted the phenomenon.Research limitations/implicationsThe study employs an approach of herd detection, which explores evidence of herding toward the market consensus. Thus, the results do not in any way exclude the possibility that other types of herding behavior exist in the EU equity markets. Notwithstanding this caveat, the findings of this study would be of special relevance to academics, regulators and policymakers in performing a cost-benefit analysis of the IFRS adoption.Originality/valueTo the researchers’ knowledge, this study is first to explore the nexus between IFRS and investors’ herding practices, while highlighting the role of the national economic culture.

On the effect of herding behavior on dependence structure between stock markets: Evidence from GCC countries

This paper aims to test whether herding behavior affects the dependence structure between stock markets in the Gulf Cooperation Council (GCC) countries, by taking account of different market conditions. Based on the cross sectional absolute deviation (CSAD) approach, herding behavior is tested in both static and regime switching framework. The dependence between GCC stock markets is assessed by the DCC-GARCH model. By using weekly data covering the period 2003–2017, empirical results show the presence of herding behavior in all GCC markets except of Bahraini and Kuwaiti markets. Furthermore, the effect of this behavior on the dependence structure is statistically significant and positive. In addition, based on the switching regime framework, results suggest the evidence of a negative effect in low herding regimes and a positive effect in high herding periods. Our findings are of interest and allow for formulating a reliable portfolios design framework for investors and risk managers.

The profitability of herding: evidence from Taiwan

PurposeThe purpose of this paper is to show that the level of herding in an industry can be the basis for a profitable investment strategy.Design/methodology/approachThe authors apply three different herding measures in the paper, including cross-sectional standard deviation, cross-sectional absolute deviation and non-linear model – state–space model.FindingsThe authors find that industries that experience a high level of herding yield higher subsequent returns regardless of their past performance. Consequently, the authors show that a herding-based investment strategy generates significant profits, even after adjusting for risk. The findings also show that the herding effect when combined with past performance as part of a conditional investment strategy yields significant profits regardless of the formation and holding periods. The findings suggest that the level of herding could serve as a systematic driver of returns and could be exploited for profitable investment strategies.Originality/valueTo the best of authors’ knowledge, this is the first study in the literature to show that herding by itself can serve as a determinant of returns regardless of past performance.

Cross-herding behavior between the stock market and the crude oil market during financial distress

Purpose The purpose of this paper is to investigate herding behavior around the crude oil market and the stock market and the possible cross-herding behavior between the two markets. The analysis examines also the herding behavior during financial turmoil and includes the investor sentiment and market volatility. Design/methodology/approach The authors use a modified version of the cross-sectional standard deviation and the cross-sectional absolute deviation to include investor sentiment, financial crisis and market volatility. Findings The authors find that the volatility of the stock market reduces the herding behavior around the oil market and boosts that around the stock market. However, the investors’ sentiment reduces the herding around the stock market and boosts that around the crude oil market. Consequently, the authors can conclude that the herding behavior around the two markets moves inversely and the herding in each market is enhanced by the lack of information in the other market. Research limitations/implications This paper is limited to the herding of stocks around the crude oil market and ignores the possible herding of commodities around the oil market. Originality/value The originality of the paper rests on the study of the possible cross-herding behavior between the oil market and the stock market especially during financial turmoil.

Herding Behavior Post Initial Public Offering In Indonesia Stock Exchange

This research was conducted to test whether there is a herding behavior post Initial Public Offering (IPO) in Indonesia Stock Exchange. Domestic transactions on the Indonesia Stock Exchange are rising year by year along with the increased of IPO emissions. The existence of underpricing phenomenon causes a domino effect (herding) that arises on potential investors after the IPO. This study used Cross-Sectional Absolute Deviation (CSAD) method to detect herding behavior. The data used were daily price data of IPO shares from the 1st day until the 30th day after IPO period 2005-2015. Hypothesis testing was done using regression analysis by means of CSAD variable as dependent variable and return market as independent variable. The result of this research indicated that there was a herding behavior post -IPO in Indonesia Stock Exchange period 2005-2015 period. It is shown by the negative and significant value of γ2 (0.013 <0.05).