Abstract:
Employing stock price data from a developing market, we examine whether
investors’ trading patterns are characterized as herd behavior at the market and
industry levels. Unlike results for some developing markets, linear models of herd
behavior find no evidence of herd formation, in any of the sectors, during periods
of large market movements. However, non-linear models find significant nonlinear herding behavior only for two sectors of the whole sample, and when we
group the sub-samples based on up and down market movements. Overall,
empirical results tend to support the notion of no herd formation in Pakistan’s
market. Two main explanations may be offered for the results: first, a developing
market, characterized by thin trading and low turnover, with few of the stocks from
various sectors actively traded in the market. Second, individual investors that
dominate Pakistan’s equity market and low levels of institutional investor’s
presence preclude herd formations.
