Exploring the Herd Behavior of Investors : A Comparative Study of the Indian and US Stock Markets

Recent research has witnessed a major shift in financial studies—from traditional finance to behavioral finance. The rejection of Efficient Market Hypothesis (EMH), several times, has led to a new era of financial studies. Herd behavior is one of the major areas of behavioral finance. Herding, basically, implies trading by a large group of investors in the same direction over a period of time. The present paper attempts to explore the existence of herd behavior in the Indian and the US stock markets. Daily prices of Nifty, its 50 constituent stocks, Dow Jones Industrial Average (DJIA) and its 30 constituent stocks are collected for five financial years from 2013-14 to 2017-18. Using Cross-Sectional Absolute Deviation (CSAD), as proposed by Chiang and Zheng (2010), the paper attempts to explore the existence of herd behavior in the Indian and the US stock markets and the impact of US markets on the herd behavior of the Indian stock markets. The results reveal that investors did not exhibit herd behavior both in the Indian and US stock markets during the study period. Even after accounting for asymmetric returns, herding is indicated by both the markets. Further, inclusion of CSAD of DJIA as an explanatory variable shows that Indian investors do not herd with US stock markets