Herding Behavior Bias and its impact on Stock Returns

A case of Pakistan Stock Exchange

Abstract

Purpose: This study investigates the presence of herding behavior, a tendency for investors to imitate each other's actions, within the Pakistan Stock Exchange (PSX) and examines how information asymmetry (lack of equal access to information) influences this phenomenon.

Methods: The study employs established herding behavior detection models by Christie and Huang (1995), Chang et al. (2000), and Chiang and Zheng (2010). Daily stock and market return data from the KSE-100 index are utilized for the analysis.

Results: The analysis reveals statistically significant evidence of herding behavior in the PSX, indicated by negative and significant coefficients. This suggests that investors in the PSX exhibit a tendency to follow the actions of others. Furthermore, the study finds a positive relationship between information asymmetry and herding behavior. This implies that investors may be more likely to herd when they perceive others to have superior knowledge due to limited information access.

Novelty: This study contributes to the understanding of herding behavior in an emerging market context (PSX). While previous research presents conflicting findings, this study provides further evidence of herding within the PSX and sheds light on the potential role of information asymmetry in influencing this behavior.

Future Implications: The study highlights opportunities for future research to explore the underlying causes of herding in the PSX. Utilizing primary data through surveys or interviews could provide richer insights. Additionally, incorporating economic indicators alongside market data can offer a more comprehensive understanding of the factors driving herding behavior in Pakistan and potentially other emerging markets.