An Empirical Analysis of Herd Behavior: Evidence from PSXPakistan Stock Exchange

Abstract

This study investigated the herding patterns in Pakistan Stock Exchange and whether Investors Herd or is it just a hoax. For this study we took data from the year 2010 till the year 2020 to analyze our results. In this study four equations were used. Two equations were from the model of Christie & Huang (1995) i.e., Cross Sectional Standard Deviation (CSSD) and two equations were from the model of Chang et al. (2000) i.e., Cross Sectional Absolute Deviation (CSAD). The estimated results in a long period of time using the CSSD & CSAD model do not show any real signs of herding as this data covered almost a decade and it is practically not possible to detect herding over such a long period of time as it covers all the bearish and bullish cycles, and the effects of these cycles are completely diluted over such a long period of time. Which is why specific sets of data were taken where it was observed that Pakistan Stock Exchange was performing irrationally. And after calculating the results from those specific sets of data using the CSAD Model, it showed that herding does exist in unusual/extreme market conditions or through bullish and bearish cycles. Where investors tend to follow the herd.