The Herding Behavior on Pakistan Stock Exchange

This paper analyzes herding behavior on the Pakistan Stock Exchange (PSX, formerly known as Karachi Stock Exchange, KSE) for a sample of 200 firms over a period of 10 years from 2004 to 2014 using two different methodologies presented by Christie and Huang (1995) and Chang et al. (2000). Herding can be defined as when investors neglect their own information and follow different investors’ investment choices. Most of the previous studies used index data for testing herding bahaviour (Javed et al., 2013; Javaria and Hassan, 2015); however, prime contribution of this research is using firm-level data. In addition, this paper explores herding behavior not only on aggregate data of 200 firms but on the basis of individual company as well. This study shows mixed results of herding phenomenon for the two methods employed in the research. The results on the basis of Christie and Huang (2004) method indicate presence of herding in the stock market while the results of Chang et al. (2000) method show an absence of herding behavior. However, individual company shows the existence of herding behavior; it refers that company follows each other during investment process. In addition, it also contradicts efficient market hypothesis where imitating behavior is considered an anomaly. On the other hand, the absence of herding behavior shows that investors do not follow each other and use its own rationale for investment. The motivation behind this research was to investigate herding behavior in Pakistani market using firm-level data because little work has been done regarding herding in Pakistan. Future research can be done to tease out the reasons for this mixed results, may employ a primary data collection method