Evidence of Herding in the Indian Stock Market Over the Past Two and Half Decade: A Critical Incident Analysis

Abstract

Purpose: Herding is the most relevant behavioural biases found among Indian investors. This paper examines the presence of herding in the Indian Stock Market over the past two and half decade years, starting in 1995.

Design/Methodology: In order to analyze the data, The entire data set was divided into three popular events, including the Chinese Stock Market Turbulence, the Subprime Mortgage Crisis, and the Asian Financial Crisis. The model developed by Chang et al. has been used for the analysis. The study explores the nonlinear relationship between market returns and  stock prices across post-crisis, crisis, and pre-crisis periods in bull and bear phases using BSE 500 data. It employs a dummy regression model named Cross Section Absolute Deviation (CSAD) for analysis.

Findings: No herding bias was detected during the Chinese Stock Market Turbulence, the Subprime Mortgage Crisis, and the Asian Financial Crisis in the pre-crisis, crisis, and post-crisis periods.

Implications: Investors will be aware of their suboptimal investment choices and potential losses. Evidence of herding will prevent the market from possible bubble burst.