An analysis of herd behaviour in the South African stock exchange.
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Date
2013
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Abstract
The stock market is an important part of the economy of a country. It plays a crucial role in
the growth of the industry and commerce of the country that eventually affects the economy
of the country to a great extent. This is the reason that the government, industry and the
country in general keep a close watch on the happenings of the stock market. It is in this
frame of mind that the current study investigates the presence of herd behaviour in the South
African stock market.
Herd behaviour occurs when investors disregard their individual information and base their
trading decision on the actions of others. Herd behaviour was measured by testing whether or
not there is a negative relationship between the dispersion of stock returns and the market
return. The study also investigates whether herd behaviour is asymmetric in different market
conditions, namely bull versus bear markets, highly volatile markets versus less volatile
markets and high trading volumes versus low trading volumes. The results point towards a
considerable presence of herd behaviour among investors at the Johannesburg Stock
Exchange (JSE). An analysis of the asymmetric effect of herding on various market
conditions reveals that herding is more pronounced during a bull market than a bear market,
during low trading volume rather than high trading volume periods and is more prevalent
during periods of low market volatility than in highly volatile markets.
This study also used the Autoregressive Distributed Lag (ARDL) approach to cointegration in
order to examine short- and long- term dynamics of investors’ herd behaviour at the JSE. The
study noted that herd behaviour is not instantaneous; rather it takes place with a lapse in time.
However, the unrestricted error correction results suggest that herd behaviour has a rather
high speed of adjustment, implying that herding is a short-lived phenomenon.
Description
Masters Degree. University of KwaZulu-Natal, Durban.