{"title":"Exploring Herding Instincts Through the Lens of Adaptive Market Hypothesis: Insights from a Frontier Market","authors":"Krishnamoorthy Charith, A. A. Azeez","doi":"10.1007/s10690-024-09486-3","DOIUrl":null,"url":null,"abstract":"<p>This study examines the time-varying nature of investor herd behavior over different market episodes in Sri Lankan stock market, that has been subjected to convulsed periods such as civil war, political instability, terrorist attacks and COVID-19 pandemic. The study employs Cross-Sectional Absolute Deviation methodology, applying quantile regression approach, to detect aggregate level herding using a survivorship-bias-free dataset of daily firm level returns from April 2000 to March 2022. The dataset is subdivided into market episodes corresponding to pre-war, bubble, crash, post-crash, pre-COVID crash, COVID bubble and post-COVID crash periods. Exhibiting an evolutionary herding pattern over market episodes, the results depict that herding appears in pre-war period irrespective of the market directions, persisting in bubble episode in upmarket days, which then, turning into negative herding in down market days in crash episode. Subsequently, herding gradually disappears in post-crash episode, reappears with greater intensity in pre-COVID crash episode and disappears in COVID bubble and post-COVID crash episodes. This study attributes such wax and wane nature of herding in financial markets to a survival action, a rational heuristic, in keeping with Adaptive Market Hypothesis. The study is of peculiar importance to investors, policymakers, regulators and researchers, as presence of herding misprices securities and invalidates the existing asset pricing models constructed on the assumptions of investor rationality.</p>","PeriodicalId":54095,"journal":{"name":"Asia-Pacific Financial Markets","volume":"68 1","pages":""},"PeriodicalIF":2.5000,"publicationDate":"2024-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Asia-Pacific Financial Markets","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1007/s10690-024-09486-3","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
This study examines the time-varying nature of investor herd behavior over different market episodes in Sri Lankan stock market, that has been subjected to convulsed periods such as civil war, political instability, terrorist attacks and COVID-19 pandemic. The study employs Cross-Sectional Absolute Deviation methodology, applying quantile regression approach, to detect aggregate level herding using a survivorship-bias-free dataset of daily firm level returns from April 2000 to March 2022. The dataset is subdivided into market episodes corresponding to pre-war, bubble, crash, post-crash, pre-COVID crash, COVID bubble and post-COVID crash periods. Exhibiting an evolutionary herding pattern over market episodes, the results depict that herding appears in pre-war period irrespective of the market directions, persisting in bubble episode in upmarket days, which then, turning into negative herding in down market days in crash episode. Subsequently, herding gradually disappears in post-crash episode, reappears with greater intensity in pre-COVID crash episode and disappears in COVID bubble and post-COVID crash episodes. This study attributes such wax and wane nature of herding in financial markets to a survival action, a rational heuristic, in keeping with Adaptive Market Hypothesis. The study is of peculiar importance to investors, policymakers, regulators and researchers, as presence of herding misprices securities and invalidates the existing asset pricing models constructed on the assumptions of investor rationality.
期刊介绍：
The current remarkable growth in the Asia-Pacific financial markets is certain to continue. These markets are expected to play a further important role in the world capital markets for investment and risk management. In accordance with this development, Asia-Pacific Financial Markets (formerly Financial Engineering and the Japanese Markets), the official journal of the Japanese Association of Financial Econometrics and Engineering (JAFEE), is expected to provide an international forum for researchers and practitioners in academia, industry, and government, who engage in empirical and/or theoretical research into the financial markets. We invite submission of quality papers on all aspects of finance and financial engineering.
Here we interpret the term ''financial engineering'' broadly enough to cover such topics as financial time series, portfolio analysis, global asset allocation, trading strategy for investment, optimization methods, macro monetary economic analysis and pricing models for various financial assets including derivatives We stress that purely theoretical papers, as well as empirical studies that use Asia-Pacific market data, are welcome.
Officially cited as: Asia-Pac Financ Markets
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