Herding Behaviour in Investors: A Study of Tadawul Financial Market
DOI:
https://doi.org/10.26668/businessreview/2023.v8i9.3695Keywords:
Financial Market, Investors, OLSAbstract
Purpose: The study investigates herding behaviour in the Tadawul stock exchange based on daily data between the years 1999 to 2019 .
Theoretical framework: Existence of uncertain situations affect the confidence level of the investor. This leads to investors changing their approach from rational to behavioural wherein they prefer to follow the judgements of others, thus engaging in herding behaviour. Several factors such as institutional investment, external factors and fundamental factors impact herding behaviour.
Methodology: The study uses OLS regression approach and accounts for the various factors such as institutional investment (percentage ownership in a stock, institutional ownership type, nationality) , external factors (global financial crisis, political instability, oil market volatility) and fundamental factors (P/E ratio, Share Turnover, Market Capitalization, Market Liquidity).
Findings: The empirical results indicate that herding is not present during the period of study. External factors and fundamental factors do not significantly impact the Cross-Sectional Absolute Deviation (CSAD) and there is no evidence of herding when accounting for these variables. However, CSAD is significantly impacted with the percentage of institutional investment, ownership and the nationality of institutional investors and there is evidence of herding when accounting for these variables.
Research Implications: As further scope the study proposes that the length of the time period may affect the findings and more robust analysis can be conducted by structural break models to understand the relative significance of the factors that may lead to herding during different time periods.
Originality: Institutional investment related factors have a significant impact on Herding behaviour of investors in the Tadawul stock exchange.
Downloads
References
ADX. (2019). ADX Yearly Performance 2019.
Ahmad, K. (2013). Lecture on Prospect Theory.
Al-kalbani, N., & Campbell, K. (2010). Tests of the weak form efficiency in the Omani Stock Market. Acuitas – The Journal of Management Research, December, 1–78.
Almujamed, H. I. (2018). Predictable returns in an emerging stock market: Evidence from Qatar. Cogent Business and Management, 5(1), 1–26. https://doi.org/10.1080/23311975.2018.1497573
Alsabban, S., & Alarfaj, O. (2020). An empirical analysis of behavioral finance in the Saudi stock market: Evidence of overconfidence behavior. International Journal of Economics and Financial Issues, 10(1), 73.
Asiri, B. K., & Abdalla, M. A. (2015). Economic Growth and Stock Market Development in Bharain. Journal of Applied Finance & Banking, 5(2), 67–80.
Asongu, S. A. (2011). Political Crises and Risk of Financial Contagion in Developing Countries: Evidence from Africa. Journal of Economics and International Finance, 3(7), 462–467. https://doi.org/10.2139/ssrn.2493091
Baabood, A. (2014). Gulf Countries and Arab Transitions: Role, Support and Effects. 2014(July), 42–47.
Balcilar, M., Demirer, R., & Hammoudeh, S. (2013). Investor herds and regime-switching: Evidence from Gulf Arab stock markets. Journal of International Financial Markets, Institutions and Money, 23, 295-321.
Barberis, N. C. (2012). Thirty Years of Prospect Theory in Economics :
Bekiros, S., Jlassi, M., Lucey, B., Naoui, K., & Uddin, G. S. (2017). Herding behavior, market sentiment and volatility: Will the bubble resume? North American Journal of Economics and Finance, 42, 107–131. https://doi.org/10.1016/j.najef.2017.07.005
BHB. (2014). Bahrain Bourse ( BHB ) General Overview & Future Outlook.
BHB. (2019). Percentage of shares traded by investors from 2015 to 2019.
Bikhchandani, S., & Sharma, S. (2000). Herd Behavior in Financial Markets: A review.
BoursaKuwait. (2019). Annual Report 2019.
Cakan, E., Demirer, R., Gupta, R., & Marfatia, H. A. (2018). Oil speculation and herding behavior in emerging stock markets. Journal of Economics and Finance, 43(1), 44–56. https://doi.org/10.1007/s12197-018-9427-0
Chang, E. C., Cheng, J. W., & Khorana, A. (2000). An examination of herd behavior in equity markets: An international perspective. Journal of Banking & Finance, 24, 1651–1679. https://doi.org/10.1111/j.0013-0133.1997.163.x
Chen, J., & Scott, G. (2020). Market Capitalization.
Chiang, T. C., & Zheng, D. (2010). An empirical analysis of herd behavior in global stock markets. Journal of Banking and Finance, 34(8), 1911–1921. https://doi.org/10.1016/j.jbankfin.2009.12.014
Choi, N., & Skiba, H. (2015). Institutional herding in international markets. Journal of Banking and Finance, 55, 246–259. https://doi.org/10.1016/j.jbankfin.2015.02.002
Chong, T. T. L., Liu, X., & Zhu, C. (2017). What Explains Herd Behavior in the Chinese Stock Market? Journal of Behavioral Finance, 18(4), 448–456. https://doi.org/10.1080/15427560.2017.1365365
Christie, W. G., & Huang, R. D. (1995). Following the Pied Piper: Do Individual Returns Herd around the Market? Financial Analysts Journal, 51(4), 31–37. https://doi.org/10.2469/faj.v51.n4.1918
Dey, M. K. (2005). Turnover and return in global stock markets. Emerging Markets Review, 6(1), 45–67. https://doi.org/10.1016/j.ememar.2004.09.003
DFM. (2019). Annual Report 2019.
Elliott, D. J. (2015). Market Liquidity : A Primer. Economic Studies at Brookings, June, 1–13. https://www.brookings.edu/wp-content/uploads/2016/07/Market-Liquidity.pdf
Fernández, B., Garcia-Merino, T., Mayoral, R., Santos, V., & Vallelado, E. (2011). Herding, information uncertainty and investors’ cognitive profile. Qualitative Research in Financial Markets, 3(1), 7–33. https://doi.org/10.1108/17554171111124595
Filip, A., Pochea, M., & Pece, A. (2015). The Herding Behavior of Investors in the CEE Stocks Markets. Procedia Economics and Finance, 32(15), 307–315. https://doi.org/10.1016/s2212-5671(15)01397-0
Fulfer, J. D., & Maille, P. J. (2018). Power and Prospect Theory. ResearchGate, January, 1–14. https://doi.org/10.13140/RG.2.2.12322.94409
Galariotis, E. C., Krokida, S. I., & Spyrou, S. I. (2016). Herd behavior and equity market liquidity: Evidence from major markets. International Review of Financial Analysis, 48, 140–149. https://doi.org/10.1016/j.irfa.2016.09.013
Ghaeli, M. R. (2017). Price-to-earnings ratio: A state-of-art review. Accounting, 3(2), 131–136. https://doi.org/10.5267/j.ac.2016.7.002
Hammoudeh, S., & Aleisa, E. (2004). Dynamic relationships among GCC stock markets and NYMEX oil futures. Contemporary economic policy, 22(2), 250-269.
Holmes, R. M., Bromiley, P., Devers, C. E., Holcomb, T. R., & McGuire, J. B. (2011). Management theory applications of prospect theory: Accomplishments, challenges, and opportunities. Journal of Management, 37(4), 1069–1107. https://doi.org/10.1177/0149206310394863
Hwang, S., & Salmon, M. (2007). Sentiment and Beta Herding. 44(0). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=299919
Indars, E. R., Savin, A., & Lublóy, Á. (2019). Herding behaviour in an emerging market: Evidence from the Moscow Exchange. Emerging Markets Review, 38, 468-487.
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. 47(March), 263–291.
Kameda, T., Inukai, K., Wisdom, T., & Toyokawa, W. (2015). The Concept of Herd Behavior: Its Psychological and Neural Underpinnings. Contract Governance, 2009, 61–71. https://doi.org/10.1093/acprof:oso/9780198723202.003.0002
Khamis, M., Hasan, M., Kumah, F., Prasad, A., & Sensenbrenner, G. (2010). Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead Middle East and Central Asia Department. In International Monetary Fund.
Khan, B. Y. M. (2014). The Economic Consequences of the Arab Spring.
Khan, H., Hassairi, S. A., & Viviani, J.-L. (2011). Herd Behavior and Market Stress: The Case of Four European Countries. International Business Research, 4(3). https://doi.org/10.5539/ibr.v4n3p53
Kim, C., Choi, Y., Lee, W., & Ahn, J. Y. (2013). Analyzing Herd Behavior in Global Stock Markets: An Intercontinental Comparison. http://arxiv.org/abs/1308.3966
Komba, G. V. (2016). Essays on investor behavior and corporate governance in sub-Saharan African frontier markets. Idm.
Kotzé, A. (2005). Stock Price Volatility : a primer. Chaos, January, 9.
Kremer, S., & Nautz, D. (2013). Causes and consequences of short-term institutional herding. Journal of Banking & Finance, 37, 1676–1686.
Kumar, A., & Singh, D. (2013). Testing Weak Form Stock Market Efficiency on Muscat Securities Market: Oman. Skyline Business Journal, 9(1), 9–13. http://search.ebscohost.com/login.aspx?direct=true&AuthType=ip,shib&db=bth&AN=94188166&scope=site
Laih, Y.-W., & Liau, Y.-S. (2013). Herding Behavior during the Subprime Mortgage Crisis: Evidence from Six Asia-Pacific Stock Markets. International Journal of Economics and Finance, 5(7), 71–84. https://doi.org/10.5539/ijef.v5n7p71
Lavy, J. S. (1992). An introduction to prospect theory. Political Psychology, 13(2), 171–185. https://www.jstor.org/stable/3791677
Li, W., Rhee, G., & Wang, S. S. (2017). Differences in herding: Individual vs. institutional investors. Pacific Basin Finance Journal, 45(71572191), 174–185. https://doi.org/10.1016/j.pacfin.2016.11.005
Li, W., & Wang, S. S. (2008). Do Institutional Trades Stabilize the Retail Investor Dominated Market ?
Lindhe, E. (2012). Herd Behavior in Stock Markets. August, 1–52.
Malkiel, Burton, G. 2003. "The Efficient Market Hypothesis and Its Critics ." Journal of Economic Perspectives, 17 (1): 59-82.
Medhioub, I., and Chaffai, M. (2019). Islamic finance and herding behavior theory: a sectoral analysis for Gulf Islamic stock market. International Journal of Financial Studies, 7(4), 65.
Mongin, P. (1999). The Handbook of economic methodology. Choice Reviews Online, 36(08), 36-4259-36–4259. https://doi.org/10.5860/choice.36-4259
MSM. (2019). Annual Statistics Data for 2019.
Nusrat, S., & Venkatachari, S. (2016). A comparative study of Banking stocks with MSM 30 Share Index (Issue 103).
Oprea, A. (2016). How will they fare on “ Judgment Day ”? Reputational Herding in Professional Communities.
Papamikrou, F. (2017). Prospect theory. http://nemertes.lis.upatras.gr/jspui/handle/10889/10668
Prabhakaran. (2017). Forecasting Stock Price Volatility - An Empirical Study on Muscat Securities Market. International Journal of Applied Sciences and Management, 2(2), 256–268.
QSE. (2013). Qatar Stock Exchange. In Qatar Stock Exchange. https://www.qe.com.qa/
QSE. (2018). Press Release.
QSE. (2019). Percentage of shares trading by investor type.
Rahman, A., Chowdhury, S., & Sadique, S. (2015). Herding where retail investors dominate trading: The case of Saudi Arabia. The Quarterly Review of Economics and Finance, 57.
Rahman, M. A., Chowdhury, S. S. H., & Shibley Sadique, M. (2015). Herding where retail investors dominate trading: The case of Saudi Arabia. Quarterly Review of Economics and Finance, 57(January), 46–60. https://doi.org/10.1016/j.qref.2015.01.002
Reuters. (2018). Qatar stock market overtakes Saudi Arabia as best performing Gulf market . The Peninsula Qatar. https://thepeninsulaqatar.com/article/01/08/2018/Qatar-stock-market-overtakes-Saudi-Arabia-as-best-performing-Gulf-market
Sharif, T., Purohit, H., & Pillai, R. (2015). Analysis of Factors Affecting Share Prices: The Case of Bahrain Stock Exchange. International Journal of Economics and Finance, 7(3). https://doi.org/10.5539/ijef.v7n3p207
Shittu, I., Ahmad, A. C., & Ishak, Z. (2016). Price to Book Value , Price to Sales Multiples and Stock Price ; Evidence from Nigerian Listed Firms. Journal of Advanced Research in Business and Management Studies, 3(1), 85–93. http://search.ebscohost.com/login.aspx?direct=true&db=psyh&AN=2018-58619-199&site=ehost-live
Tadawul. (2019). Market reports (Issue December).
Vo, X. V., & Phan, D. B. A. (2019). Herding and equity market liquidity in emerging market. Evidence from Vietnam. Journal of Behavioral and Experimental Finance, 24, 100189. https://doi.org/10.1016/j.jbef.2019.02.002
Wall Street Journal (2012). Asset Management Industry in the GCC- Growth Dynamics and Contours on the Next Phase of the Evolution. Markab Advisory.
Wolitzky, A. (2015). Critiques of Expected Utility. 1–24.
Wong, T. S. (2019). Characteristics of stocks and individual investor herd behavior: A causal-comparative study. Dissertation Abstracts International Section A: Humanities and Social Sciences, 80(2-A(E)). http://search.ebscohost.com/login.aspx?direct=true&db=psyh&AN=2018-58619-199&site=ehost-live
Youssef, M., & Mokni, K. (2018). On the effect of herding behavior on dependence structure between stock markets: Evidence from GCC countries. Journal of Behavioral and Experimental Finance, 20, 52-63
Zheng, D., Li, H., & Zhu, X. (2015). Herding behavior in institutional investors: Evidence from China’s stock market. Journal of Multinational Financial Management, 59–76. https://doi.org/10.1016/J.MULFIN.2015.09.001
Downloads
Published
How to Cite
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.
Authors who publish in this journal agree to the following terms: the author(s) authorize(s) the publication of the text in the journal;
The author(s) ensure(s) that the contribution is original and unpublished and that it is not in the process of evaluation by another journal;
The journal is not responsible for the views, ideas and concepts presented in articles, and these are the sole responsibility of the author(s);
The publishers reserve the right to make textual adjustments and adapt texts to meet with publication standards.
Authors retain copyright and grant the journal the right to first publication, with the work simultaneously licensed under the Creative Commons Atribuição NãoComercial 4.0 (http://creativecommons.org/licenses/by-nc/4.0/), which allows the work to be shared with recognized authorship and initial publication in this journal.
Authors are allowed to assume additional contracts separately, for non-exclusive distribution of the version of the work published in this journal (e.g. publish in institutional repository or as a book chapter), with recognition of authorship and initial publication in this journal.
Authors are allowed and are encouraged to publish and distribute their work online (e.g. in institutional repositories or on a personal web page) at any point before or during the editorial process, as this can generate positive effects, as well as increase the impact and citations of the published work (see the effect of Free Access) at http://opcit.eprints.org/oacitation-biblio.html
