Investigating Investor Herding in the Pakistan Stock Market (PSX): A Sectoral Analysis

Abstract

The current study aimed to delve into the phenomenon of investors' herding within the Pakistan Stock Exchange (PSX) and its various sectors. It focused on patterns within sectors and on market conditions that are volatile. The research used established herding measures, Cross-Sectional Standard Deviation (CSSD), and Cross-Sectional Absolute Deviation (CSAD), proposed by Christie and Huang in 1995 and Chang et al. in 2000. The analysis relied on intraday, daily, and weekly return data from 620 listed firms. The evidence showed that return differences increase, rather than decrease, during times of high market activity. This indicates there is no significant herding at the overall market level or within individual sectors. These results challenge the usual assumptions in behavioural finance that investors follow during uncertain times. Instead, they suggest that investors in the PSX are more independent and rational. The study emphasized the need for regulatory strategies tailored to specific sectors. These strategies should recognize this independence and promote transparency, investor education, and evidence-based policymaking to improve market resilience.

 A market-wide herding measure known as Cross-Sectional Standard Deviation (CSSD) Cross sectional absolute deviation (CSAD) models introduced by Christie & Huang (1995) and Chang et al. (2000)  is applied to assess the presence of herding behavior. To conduct this analysis, the study utilizes intraday, daily, and weekly stock returns from a sample of 620 companies listed on the Pakistan stock exchange.  The findings suggest that the variability of equity returns often rises during times of significant price volatility instead of falling, indicating a lack of herding behavior. The results indicate that neither the PSX nor its individual sectors exhibit any significant herding tendencies. The results  highlight the need for policymakers and market participants to develop sector-specific strategies that leverage this independence, challenging traditional assumptions of uniform investor behavior and promoting more informed market practices.

Keywords: Herding Behavior, Cross sectional standard deviation, Cross sectional absolute deviation, Pakistan stock market

JEL Classification: G11, G12, G14