Exploring Herding Instincts Through the Lens of Adaptive Market Hypothesis: Insights from a Frontier Market

IF 2.5 Q2 ECONOMICS
Krishnamoorthy Charith, A. A. Azeez
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Abstract

This study examines the time-varying nature of investor herd behavior over different market episodes in Sri Lankan stock market, that has been subjected to convulsed periods such as civil war, political instability, terrorist attacks and COVID-19 pandemic. The study employs Cross-Sectional Absolute Deviation methodology, applying quantile regression approach, to detect aggregate level herding using a survivorship-bias-free dataset of daily firm level returns from April 2000 to March 2022. The dataset is subdivided into market episodes corresponding to pre-war, bubble, crash, post-crash, pre-COVID crash, COVID bubble and post-COVID crash periods. Exhibiting an evolutionary herding pattern over market episodes, the results depict that herding appears in pre-war period irrespective of the market directions, persisting in bubble episode in upmarket days, which then, turning into negative herding in down market days in crash episode. Subsequently, herding gradually disappears in post-crash episode, reappears with greater intensity in pre-COVID crash episode and disappears in COVID bubble and post-COVID crash episodes. This study attributes such wax and wane nature of herding in financial markets to a survival action, a rational heuristic, in keeping with Adaptive Market Hypothesis. The study is of peculiar importance to investors, policymakers, regulators and researchers, as presence of herding misprices securities and invalidates the existing asset pricing models constructed on the assumptions of investor rationality.

Abstract Image

通过适应性市场假说的视角探索羊群本能:前沿市场的启示
斯里兰卡股票市场曾经历内战、政治动荡、恐怖袭击和 COVID-19 大流行等动荡时期,本研究探讨了不同市场时期投资者羊群行为的时变性。本研究采用交叉绝对偏差方法,运用量子回归法,利用 2000 年 4 月至 2022 年 3 月期间公司层面每日回报的无幸存者偏差数据集来检测总体水平的羊群效应。数据集被细分为战前、泡沫、崩盘、崩盘后、COVID 崩盘前、COVID 泡沫和 COVID 崩盘后时期的市场事件。结果表明,在战前时期,无论市场走向如何,羊群效应都会出现,在泡沫时期,羊群效应在市场上涨的日子里持续存在,而在市场下跌的日子里,羊群效应又会在市场崩溃的日子里转化为消极的羊群效应。随后,羊群效应在暴跌后逐渐消失,在 COVID 暴跌前以更大强度重新出现,并在 COVID 泡沫和 COVID 暴跌后消失。本研究将金融市场中羊群效应的这种此消彼长的性质归因于一种生存行为,一种理性的启发式思维,符合自适应市场假说。这项研究对投资者、政策制定者、监管者和研究人员具有特别重要的意义,因为羊群效应的存在会对证券进行错误定价,并使基于投资者理性假设构建的现有资产定价模型失效。
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来源期刊
CiteScore
3.00
自引率
0.00%
发文量
34
期刊介绍: The current remarkable growth in the Asia-Pacific financial markets is certain to continue. These markets are expected to play a further important role in the world capital markets for investment and risk management. In accordance with this development, Asia-Pacific Financial Markets (formerly Financial Engineering and the Japanese Markets), the official journal of the Japanese Association of Financial Econometrics and Engineering (JAFEE), is expected to provide an international forum for researchers and practitioners in academia, industry, and government, who engage in empirical and/or theoretical research into the financial markets. We invite submission of quality papers on all aspects of finance and financial engineering. Here we interpret the term ''financial engineering'' broadly enough to cover such topics as financial time series, portfolio analysis, global asset allocation, trading strategy for investment, optimization methods, macro monetary economic analysis and pricing models for various financial assets including derivatives We stress that purely theoretical papers, as well as empirical studies that use Asia-Pacific market data, are welcome. Officially cited as: Asia-Pac Financ Markets
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