Herd Behavior Analysis in Tehran Stock Exchange with Chiang and Zheng Model

Document Type : Research Paper

Authors

1 Assistant Prof., Department of MBA, Faculty of Management, University of Tehran, Tehran, Iran.

2 Assistant Prof., Department of Economics, Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran.

3 MSc Student, Department of MBA, Faculty of Management, University of Tehran, Tehran, Iran.

4 MSc, Department of MBA, Faculty of Management, University of Tehran, Tehran, Iran.

Abstract

Objective: Behavioral finance, as a sub-field of behavioral economics, has posed many challenges to classic financial theories and market efficiency. In general, herd behavior emerges when investors decide to follow other investors rather than relying on their own analysis and knowledge and change their decisions based on other investors’ opinions. Even though this behavior may be rational for less sophisticated investors, the existence of wide herding may result in volatility in returns and instability of the capital market, which is known as a source of financial risk. The purpose of this study is to investigate the herd behavior among investors in Tehran Stock Exchange during the 4-year period from 23/05/2015 to 21/05/2019.
Methods: This study examines the existence of wide herding among investors in Tehran Stock Exchange by using the Chiang and Zheng model which is an econometric model based on the daily return of sectors, the daily return of the selected portfolio and cross-sectional absolute deviation. Besides, Chiang and Zheng model is the only econometric based model which can detect herd behavior in up-markets and down-markets separately.
Results: The findings of the study clearly illustrate that the assumption of investors herd behavior in the market has been confirmed. In addition, herd behavior is stronger in the up-markets than the down-markets during the mentioned 4-year period. It should be noted that herd behavior was detected in both up- markets and down- markets, but the intensity was higher in up-markets.
Conclusion: With respect to the obtained coefficients in the regression equations and the type of herd behavior in terms of occurring in down markets or up markets, it can be concluded that investors in Tehran Stock Exchange are generally affected by herd behavior, but in periods of market decline, investors decide and act somewhat more rational, and they show lower intensity of herd behavior in their investments.

Keywords

References

Arab Mazar Yazdi, M., Badri, A., Azizian, A. (2013). An Empirical Investigation of Herd Behavior: Evidence from TSE. Empirical Studies in Financial Accounting, 10(39), 1-27. (in Persian)
Azar, A., Saranj, A., Sadeghi Moghadam, A., Rajabzadeh, A., Moazzez, H. (2018). The Agent-based modeling of stockholders’ behavior in Iranian capital market. Financial Research, 20(2), 130-150. (in Persian)
Babajani, J., Ebadi, J. & Moradi, N. (2015). Herding behaviour in mutual fund industry, evidence from Tehran Stock Exchange. Empirical Studies in Financial Accounting, 12(47), 47-71.
Barzegari Khaneghah, J., Hejazi, R. & Rezazadeh, F. (2017). Analysis of the impact of media coverage on investors' decision making. The financial Accounting and Auditing Researches, 9(33), 107-124. (in Persian)
Bikhchandani, S., & Sharma, S. (2000). Herd behavior in financial markets. IMF Staff papers, 47(3), 279-310.
Borowski, K. (2019). Should Investors on Equity Markets Be Superstitious? (Example of 7 World Stock Indexes Components). International Journal of Economics and Finance, 11(1), 151-151.‏
Cai, F., Han, S., Li, D. & Li, Y. (2017). Institutional Herding and Its Price Impact: Evidence from the Corporate Bond Market. Journal of Financial Economics, 131(1), 139-167
Calvo, G. A., & Mendoza, E. G. (1997). Rational herd behavior and the globalization of securities markets (No. 120). Federal Reserve Bank of Minneapolis.‏
Chang, E. C., Cheng, J. W., & Khorana, A. (2000). An examination of herd behavior in equity markets: An international perspective. Journal of Banking & Finance, 24(10), 1651-1679.
Chen, T. (2013). Do investors herd in global stock markets? Journal of Behavioral Finance, 14(3), 230-239.
Chiang, T. C., & Zheng, D. (2010). An empirical analysis of herd behavior in global stock markets. Journal of Banking & Finance, 34(8), 1911-1921.
Christie, W. G., & Huang, R. D. (1995). Following the pied piper: Do individual returns herd around the market? Financial Analysts Journal, 51(4), 31-37.
Demirer, R., Kutan, A. M., & Chen, C. D. (2010). Do investors herd in emerging stock markets? Evidence from the Taiwanese market. Journal of Economic Behavior & Organization, 76(2), 283-295.
Devenow, A., & Welch, I. (1996). Rational herding in financial economics. European Economic Review, 40(3-5), 603-615.
Economou, F., Katsikas, E., & Vickers, G. (2016). Testing for herding in the Athens Stock Exchange during the crisis period. Finance Research Letters, 18, 334-341.‏
Economou, F., Kostakis, A., & Philippas, N. (2011). Cross-country effects in herding behaviour: Evidence from four south European markets. Journal of International Financial Markets, Institutions and Money, 21(3), 443-460.
Golarzi, Gh., Ziyachi, A. (2014). A Survey in Investor Herding Behavior With Trading Volume Approach in Tehran Stock Exchange. Financial Research, 16(2), 359-371. (in Persian)
Goldbaum, D. (2008). Coordinated investing with feedback and learning. Journal of Economic Behavior & Organization, 65(2), 202-223.
Grinblatt, M., Titman, S., & Wermers, R. (1995). Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior. The American economic review, 85(5), 1088-1105.
Han, X. (2020). Empirical Research on the Herd Behavior in Chinese Stock Market.‏ 2020 3rd International Conference on Financial Management, Education and Social Science (FMESS 2020). China.
Hirshleifer, D., & Hong Teoh, S. (2003). Herd behaviour and cascading in capital markets: A review and synthesis. European Financial Management, 9(1), 25-66.
Hwang, S., & Salmon, M. (2004). Market stress and herding. Journal of Empirical Finance, 11(4), 585-616.
Jamshidi, N., Ghalibaf Asl, H. (2018). Studying the Effect of Investors’ Personality on their Business Behavior and Investment Performance: Evidences of Tehran Stock Exchange. Financial Research, 20(1), 75-90. (in Persian)
Jamshidi, N., Ghalibaf Asl, H., Fadaei Nejad, M. (2019). Studying the Overconfidence and Representativeness Biases of Individual Investors in Tehran Stock Exchange. Financial Research, 21(2), 143-164. (in Persian)
Khodaparast, J., Ghasemi, M., Rahman Setayesh, A. (2010). Investigating the effects of Herding behavior on emerging rational bubbles. Iranian Journal of Economic Studies, 1(2), 27-51. (in Persian)
Lakonishok, J., Shleifer, A., & Vishny, R. W. (1992). The impact of institutional trading on stock prices. Journal of financial economics, 32(1), 23-43.
Lindhe, E. (2012). Herd behavior in stock markets: A Nordic study, Master thesis. Lund. Lund University.
Nofsinger, J. R. (1996). Tests of herding and positive feedback trading strategies by institutions and individuals (Doctoral dissertation, Washington State University).
Olsen, R. A. (1996). Implications of herding behavior for earnings estimation, risk assessment, and stock returns. Financial Analysts Journal, 52(4), 37-41.
Pourzamani, Z. (2012). Appraising the Herding Behavior on Institutional Investors with Christie and Huang Model in Tehran Stock Exchange. Journal of Investment Knowledge, 1(3), 147 -160. (in Persian)
Ramadan, I. Z. (2015). Cross-sectional absolute deviation approach for testing the herd behavior theory: The case of the ASE Index. International Journal of Economics and Finance, 7(3), 188-193.‏
Ramiah, V., Xu, X., & Moosa, I. A. (2015). Neoclassical finance, behavioral finance and noise traders: A review and assessment of the literature. International Review of Financial Analysis, 41, 89-100.
Saedi, R., Rezaeian, V. (2019). The Effect of the Manager’s Excessive Self-Confidence on Stock Returns and Unsystematic Stock Risk Given the Dual Role of Managing Director: Evidence from Tehran Stock Exchange. Financial Research, 21(1), 79-100. (in Persian)
Scharfstein, D. S., & Stein, J. C. (1990). Herd behavior and investment. The American Economic Review, 465-479.
Shams, S., & Esfandiari Moghaddam, A.T. (2017). The impact of herding behavior on the performance of investment companies based on modern and post modern portfolio theory. Financial Research Journal, 19(1), 675 - 960. (in Persian)
Soleymani Mareshk, M., Hashemi, S.A., & Samadi, S. (2018). Industry Based on Style Investing and Retail Investors. Financial Research Journal, 19(4), 557 - 578. (in Persian)
Swank, O., & Visser, B. (2008). The consequences of endogenizing information for the performance of a sequential decision procedure. Journal of Economic Behavior & Organization, 65(3-4), 667-681.
Tan, L., Chiang, T. C., Mason, J. R., & Nelling, E. (2008). Herding behavior in Chinese stock markets: An examination of A and B shares. Pacific-Basin Finance Journal, 16(1-2), 61-77.
Waysi, A. (2017). The study of the herding behavior on the volatility of Tehran Stock Exchange return, MSc thesis. Tabriz. University of Tabriz. (in Persian)
Zheng, D., Li, H., & Chiang, T. C. (2017). Herding within industries: Evidence from Asian stock markets. International Review of Economics & Finance, 51, 487-509.‏
Financial Research Journal
Volume 22, Issue 3
2020
Pages 388-407

Files

Share

How to cite

Statistics