Do investors herd in Indian market

Abstract

This paper examines the presence of herd behavior in Indian stock market in extreme market conditions using data from the National Stock Exchange. The study used the measures suggested by Christie and Huang (Financial Anal J 51:31–37, 1995) and Chang et al. (J Bank Finance 24:1651–1679, 2000) based on cross-sectional standard deviation and cross-sectional absolute deviation, respectively. Empirical results based on daily, weekly, and monthly data indicate that during periods of extreme price movements, equity return dispersions tend to increase rather than decrease, hence providing evidence against the presence of herding in the Indian stock market for the years 2000–2013. Even no evidence of herding is found during the extremely high and extremely low trading volume days. Owing to the regulatory reforms of the Indian equity market and the intense presence of the foreign institutional investors, investors’ behavior seems more rational, that validates the application of rational pricing models in the Indian stock markets.