An Empirical Investigation of Herd Behaviour in Surplus Economy: Evidences from Muscat Stock Market

Abstract

: This study investigates herd behaviour in the surplus economy of the Sultanate of Oman under Bear and Bull market conditions. The first aim of the study is to determine if the investors at Muscat Stock Market (MSM) exhibit herd behavior or not. The second aim of the study is to compare the different stochastic time-series models commonly used to test and forecast herd behavior. Finally, the study aims to determine whether herd behavior in the MSM is predominantly risk-driven as measured by Cross-Sectional Standard Deviation (CSSD) or return-driven as measured by Cross-Sectional Absolute Deviation (CSAD) of stock returns from the overall market return. Our analyses are based on daily Muscat Stock Market’s (MSM) index returns for the period starting 1st of January 2010 and ending 31 st of December 2019, the pre Covide-19 pandemic. Our findings disclose: (1) that MSM exhibits herd behavior, (2) that there are statistically significant among the different stochastic time-series models used to test and forecast herd behavior in MSM, where ARIMA (1,0,0) model exhibits the highest predictive power of herd behavior in MSM (3), that MSM’s herd behavior is driven more by CSSD than CSAD in the bearish and bullish market conditions.