An Examination of Herd Behaviour: Evidence from Colombo Stock Exchange

Abstract

Traditional Finance theory presumed that equity market participants make decisions based on rational platforms. However, recent market incidents witnessed investors’ decision-making process is fueled with irrational behaviour like herding. Herding behaviour is a dominant behavioural bias that depicts investors make decisions based on imitating other investors’ behaviour. The lack of research regarding herding, done in emerging markets especially in the Sri Lankan context and the inconclusive results of the studies undertaken, were the key motives for this study. Hence, this study attempts to examine the herding behaviour among investors in Colombo Stock Exchange (CSE) and to identify herding among Bull and Bear market phrases. The daily share return of 20 companies in the S&P 20 index from 2007 to 2018 were taken for the study and the All Share Price Index is used as the proxy for market returns. The model, Cross-Sectional Absolute Deviation (CSAD) and Cross-Sectional Standard Deviation (CSSD) were used to detect market-wide herding. Results obtained fail to find any evidence regarding Herding in Colombo Stock Exchange during the Period of Study. Significant but positive coefficient values attached to the CSAD method implied the absence of Herding in the overall market as well as bull and bear phrases. CSSD method further implied the absence of Herding behaviour during the period of study. Further, this study reflects investors in CSE purely look at risk-return properties of individual counters rather than following other investors behaviour. It reflects the majority of investors in CSE purely take decisions based on rational analysis of price-sensitive risk-return information rather than based on irrational behaviour like herding. Lacking the behavioural biases like herding among the capital market participants transmit a message to regulators and policymakers to develop sound capital market infrastructure based on rational finance theories. Investors should rely on logical information to avoid being bias before taking their investment actions.