Empirical Study of Herd Behavior in Equity Markets in India

Abstract

The extant literature on behavioural finance argues that cognitive and emotional newlinebiases cause anomalies in financial markets that cannot be explained from the newlineperspective of the standard financial theory paradigms which assume investor newlinerationality. The proponents of behavioural finance advocate that investors are driven newlineby psychology and their investment behaviour is determined by factors such as newlineheuristics, computational shortcuts, and emotions that underpin asset prices. Further, newlinethe behavioural biases persist at individual and collective levels, both, and impact the newlinefinancial decisions resulting in asset mispricing generating price trends and causing newlineindiscriminate buying or bubbles or massive sales or crashes. During such periods, newlineinvestors have the propensity to follow the general market consensus and overlook the newlineprivate information resulting in herd behaviour in financial markets. Herding is an newlineintent whereby investors follow the trading styles of other fellow investors who trade newlinein the stock market, thereby mimicking a group of probably better-informed newlineindividuals and ignoring their private information. This phenomenon provides newlineplausible explanations for speculative bubbles and crashes adding to the relevance of newlinestudying herd behaviour. In addition, the impact of the herd phenomenon has been newlinefound to be magnified in the interconnected and globalized financial markets where newlinethe shocks in one market are transmitted to others that cause enormous global newlineconsequences. newlineThrough this research endeavour, it will be interesting to explore herding in the fifthlargest stock market of India that is witnessing huge investor interest especially in the newlinenew era of G20 presidency. ... newline