Investigating Investor Herding in the Pakistan Stock Market: A Sectoral Analysis

Abstract

The current study delves into the phenomenon of investors' herding within the Pakistan Stock Exchange (PSX) and its various sectors. The study operates under the   assumption that herd behavior among investors is primarily driven by fundamental information, resulting in price adjustments that align with newly available data and contribute to market efficiency. Conversely, there is a counterargument positing that fundamental information does not instigate herd behavior, consequently leading to price. The study has evaluated the herding behavior demonstrated by all firms listed on the Pakistan Stock Exchange (PSX), especially during times of crisis. A market-wide herding measure known as Cross-Sectional Standard Deviation (CSSD) Cross sectional absolute deviation (CSAD) models introduced by Christie & Huang (1995) and Chang et al. (2000) is applied to assess the presence of herding behavior: To conduct this analysis, the study utilizes intraday, daily, and weekly stock returns from a sample of 620 companies listed on the Pakistan stock exchange.  The findings suggest that the variability of equity returns often rises during times of significant price volatility instead of falling, indicating a lack of herding behavior. The results indicate that neither the PSX nor its individual sectors exhibit any significant herding tendencies. The results highlight the need for policymakers and market participants to develop sector-specific strategies that leverage this independence, challenging traditional assumptions of uniform investor behavior and promoting more informed market practices.