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The herding behaviour on Pakistan stock exchange – using firm-level data

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DOI: 10.1504/AAJFA.2020.104407

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Afro-Asian J. Finance and Accounting, Vol. 10, No. 1, 2020 71

The herding behaviour on Pakistan stock exchange –

using firm-level data

Fasiha Kiran and Naimat U. Khan*

Institute of Management Studies,
University of Peshawar,
Peshawar, Pakistan
Email: pearl_30@hotmail.com
Email: naimatims@yahoo.com
*Corresponding author

Attaullah Shah
Institute of Management Sciences,
1-A, Sector E/5, Phase – VII, Hayatabad, Peshawar, Pakistan
Email: attaullah.shah@imsciences.edu.pk

Abstract: This paper analyses herding behaviour in the Pakistan stock

exchange (PSX, formerly known as Karachi stock exchange, KSE) for a sample
of 663 firms over a period of 13 years, from 2004 to 2017. For detecting
herding behaviour, two dependent variables are used, i.e., cross-sectional
standard deviation (CSSD) of Christie and Huang (1995) and cross-sectional
absolute deviation (CSAD) of Chang et al. (2000). The results show no herding
behaviour on the basis of both methods at different levels of market
movements. The absence of the herding behaviour may be because these firms
belong to different sectors which may follow their respective industry
portfolios but not the overall market; for example, Shah et al. (2017)
documented that firms in several industries herd toward their industry
portfolios for Pakistani data. Future research can be done using a primary data
collection method from investors about their opinion on herding behaviour.

Keywords: herding; anomaly; efficient market hypothesis; behavioural

finance; Pakistan.

Reference to this paper should be made as follows: Kiran, F., Khan, N.U. and
Shah, A. (2020) ‘The herding behaviour on Pakistan stock exchange – using
firm-level data’, Afro-Asian J. Finance and Accounting, Vol. 10, No. 1,
pp.71–84.

Biographical notes: Fasiha Kiran is a scholar at the Institute of Management

Studies University of Peshawar, Peshawar, Pakistan. She completed her BS and
MS in Business Administration with specification of Finance from the
University of Peshawar Pakistan.

Naimat U. Khan is an Assistant Professor at the Institute of Management

Studies, University of Peshawar, Peshawar, Pakistan. He was awarded his PhD
degree from the University of Dundee, UK. His principal research interests lie
in the field of corporate finance, accounting and political economy. He is a

Copyright © 2020 Inderscience Enterprises Ltd.

72 F. Kiran et al.

member of the editorial board of Qualitative Research in Financial Markets.

Currently, he is based in the USA for his Fulbright postdoctoral fellowship to
analyse the relationship between law and finance.

Attaullah Shah is an Associate Professor of Finance at the Institute of

Management Sciences, Peshawar Pakistan. He holds his PhD in Finance. He
completed his postdoctoral studies from the University of Kentucky, USA. He
teaches courses related to finance, risk management, investment and computer
applications in finance. His areas of interests include dividend decisions, capital
structure, debt-maturity structure, asset pricing models, mutual fund
performance and impact of judicial efficiency on corporate decisions. He is the
Chief Editor of Business and Economic Review. He has published extensively
in leading journals in the area of finance including Journal of Corporate
Finance and Economic Modelling etc. He has also written several Stata
programs such asdoc, asrol, asreg, astile, ascol, asgen and searchfor.

This paper is a revised and expanded version of a paper entitled ‘The herding
behavior on the Karachi stock exchange Pakistan’ presented at Fourth
International Conference on Advances in Management, Economics and Social
Science – MES 2016, Rome, Italy, 18–19 August 2016.

1 Introduction

Herding1 is the imitative behaviour of investors in the financial markets. According to

Banerjee (1992), herding behaviour occurs when people follow others rather than making
decisions on their own information. Herding behaviour comes under the domain of
behavioural finance. Behavioural finance is considered an important development in a
sense that it can answer why and how markets are inefficient. These answers are usually
based on the psychology of investors. It consolidates behavioural and psychological
theory with traditional finance to give clarifications for non-rational financial choices
(Bikhchandani and Sharma, 2000; Christie and Huang, 1995; Rook, 2006).
Herding behaviour is one of the anomalies that stands in contrast to the efficient
market hypothesis which says that today prices of the assets fully reflect all available
information (Fama, 1970).2 EMH is based on the traditional view of finance that
investors are rational in their decisions and any irrational behaviour can be exploited by
arbitrageurs. However, behaviour finance asserts that investors can be irrational due to
emotions and limited cognitive ability; hence, any arbitrage opportunities due to irrational
behaviour cannot be exploited (Barberis and Thaler, 2003). Herding is one of these
anomalies which challenge the presence of an efficient market.
Herding behaviour has been observed in both developed and emerging markets
(Caparrelli et al., 2004; Economou et al., 2011; Mobarek et al., 2014; Javaira and Hassan,
2015; Shah et al., 2017). The motivation behind this research is to investigate herding
behaviour in a Pakistani market where relatively limited work had been done on this
topic. This paper contributes to the literature on the following grounds. First, this paper
uses two widely used models of herding behaviour, i.e., Christie and Huang (1995) and
Chang et al. (2000). Therefore, the results reported in this paper are more robust as
compared to other studies in Pakistan that use a single model such as Shah et al. (2017).
Second, this study uses daily data of 663 firms for an extended period of 2004 to 2017.
 The herding behaviour on Pakistan stock exchange 73

Such a rich dataset has not only more observations but also most recent data. No previous
study in Pakistan uses daily data for such a large sample of firms.
The remainder of the paper is organised as follow. Section 2 gives detail about
Pakistani equity market. Section 3 covers the literature on past studies from both
emerging and developed economies. Section 4 presents insights on the methodology.
Whereas, Section 5 present the results, followed by Section 6 about the conclusion and
limitations of the research.

2 Overview of Pakistani equity market

There were three stock exchanges in Pakistan: Karachi, Lahore and Islamabad.3 The three
stock exchanges were merged into one which is now called the Pakistan stock exchange
or the PSX. The performance of a stock exchange is considered as a yardstick to judge
economic growth in a country. To measure the performance of a stock exchange,
different indexes are used. The KSE-50 was the first index used for this purpose which
was replaced by KSE-100 Index on November 2, 1991, with a base of 1,000 points.
Hence, the KSE-100 Index is the main tool to measure the performance of PSX.4
Over the 26-year period, the KSE-100 Index witnessed a growth of 4,656% reaching
46,565 points on June 30, 2017. In the 1990s, the KSE-100 Index showed a very normal
growth of 127% despite the increase in listed firms and substantial measures of
liberalisations in the economy. However, the Index witnessed remarkable increase since
9/11 with an abnormal increase of 3,658%. The KSE-100 Index increased from 1,273 to
6,218 points (388%) by the end of 2004. The bullish trend occured even though listing of
companies decreased due to non-compliance with the Code of Corporate Governance of
2002 (Akhtar and Khan, 2016). Studies show that the bullish trend is attributed to the
USA aid and easing of economic sanctions due to partnering in the war on terror. Till
March 15, 2005, the bullish trend of the KSE-100 Index reached a peak of
10,303 points showing a 65% increase. And then, the Index encountered a drop down of
about 25% in eight trading days resulting in the 2005 crash. Medium and small investors
lost about Rs. 750 billion as a result of this crash (Khan and Khan, 2016).
The effect of the crash was short-lived and Index regained its pace at 9,556 points at
the end of 2005 and 14,077 points at the end of 2007. Studies show that resurgence in the
Index was due to improved economic indicators, for example, the GDP growth remained
above 7% during 2005–2007 (Husain, 2008). The KSE-100 Index continued a bullish
trend and reached a the highest-ever level of 15,676 points on April 18, 2008. Afterward,
the Index dropped abnormally on August 28, 2008, when the KSE administration froze
the index and stopped the trading floor from further declines. The KSE resumed its
trading on December 15, 2008. During this period, the KSE sustained a loss of about
Rs. 36.9 billion with a 58% decline of the KSE-100 Index to 5,865 points at the end of
2008. The global financial crises coupled with the new government in 2008 contributed
to this bearish trend (Khan et al., 2017). After this crash, the administration took some
measures to control the volatility including the introduction of 5% cap on the fluctuation
of share prices on a single day (Akhtar and Khan, 2016). After the bearish trend in the
last half of 2008 and in early 2009, the Index showed a resilience and reached 16,905 and
32,812 points at the end of December 2012 and 2015 respectively. The listed companies
on the KSE are 557 at the end of 2014 (The PSX’ website). It is worthy to mention that
74 F. Kiran et al.

imposition of capital gains taxation of 2010 did not affect the bullish trend despite the
fact that the transaction costs increased (Khan et al., 2017).
There are main reasons behind the bullish trend such as: allowed investment on stock
exchanges without proper scrutiny for the source of income between April 2012 and
June 2014; political stability; business-friendly new government in 2013; low valuation
of Pakistani market in South Asia; clearing circular debts in Pakistan; Chinese investment
in Pakistan; increase in remittances and recovery of global economies after GFC, etc.
(Khan, 2017)
The demutualisation of three stock exchanges into a single exchange in January 2016
had a positive impact whereby the Index reached 47,807 and 46,565 points by the
December 2016 and June 2017 (PSX’ website, 2017).
Several studies have investigated the presence of anomalies in the Pakistan stock
exchange. Recently, Sadaqat and Butt (2017) studied whether liquidity can explain size
and volatility related anomalies in PSX. They used firm-level data from 1993 to 2015 and
found that these anomalies offer 30% to 50% annual returns in PSX. Syed and Khan
(2017) studied Islamic calendar anomalies in PSX, using KSE-100 Index data over the
period 1991–2014. The authors report evidence of change in volatility in some of the
Islamic calendar months, however, no compelling evidence of abnormal returns
associated with Islamic calendar were found. Similarly, Khan and Khan (2016) tested the
weak form of market efficiency of PSX. The authors found that the market is not efficient
in its weak form for a daily and weekly frequency of data. However, the returns series
does show random walk for a monthly frequency. One of the anomalies is the presence of
momentum profits. Several papers have devoted attention to this area as well in Pakistan.
For example, Shah and Shah (2015, 2018) report compelling evidence of the existence of
momentum profits in PSX. Besides weak form of market efficiency, Pakistani market is
generally characterised by a weak governance system (Ullah and Kamal, 2017; Ullah
et al., 2017).

3 Literature review

The literature is divided into two sections: the first part gives evidence from developed
and emerging markets followed by studies from Pakistan.

3.1 Herding behaviour in developed and emerging markets

According to classical finance, investors are rational and make their decisions on the
basis of available information, hence investors cannot outperform the market in long run.
However, proponents of behavioural finance assert that investors’ behaviour can affect
assets prices in an irrational way. They make irrational decisions while suppressing own
information and following information of other participants in the market, the
phenomenon known as herding. According to rational pricing models, the dispersion of
stock returns increases in market stress. However, in case of herding, the dispersion of
individual stock returns to the market returns decrease as firms follow each other in the
market. Christie and Huang (1995) measured this dispersion with the help of
cross-section standard deviation (CSSD) in extreme market condition for the NYSE.
Using 1% and 5% deviation of individual stocks from the market returns, the authors
 The herding behaviour on Pakistan stock exchange 75

found high dispersion and did not find any herding behaviour for the monthly data for the
US firms.
The CSSD is based on the assumption of a linear relationship between stock returns
dispersion and market returns, however, this relationship can be nonlinear as well (Chang
et al., 200). Based on the assumption of nonlinearity, Chang et al. (2000) introduced
another method of capturing the dispersion, i.e., cross-sectional absolute deviation
(CSAD) using a data of five countries from both developed and emerging countries, i.e.,
the USA, Japan, Hong Kong, South Korea and Taiwan. The results showed no evidence
of herding for the USA and Hong Kong, partial presence of herding for the Japanese
market and strong evidence of herding for South Korea and Taiwan.
The presence or absence of herding also varies across countries, market condition
(normal or crisis), industries, choice of method (CSSD or CASD), type of investors etc.
For example, the literature shows different results for employing the CSSD and CASD
methods. While using the method of Chang et al. (2000) and Economou et al. (2011)
showed herding for Greek, Italy and Portuguese markets but could not find herding effect
in Spanish economy during Global Financial Crisis of 2008. In addition, they found
herding for all four markets using CSSD method of Christie and Huang (1995). However,
several studies show the existence of herding for both methods, i.e., Caparrelli et al.
(2004) for Italian equity market,
Literature shows mixed results for herding in normal and crisis conditions of the
stock market. For example, Mobarek et al. (2014) examined herding behaviour in
European market, i.e., Continental, Nordic countries and Italy, Ireland, Portugal, Greece
and Spain (PIIGS) for daily data over the period 2001–2012. The results showed that
herding effect was not significant in Europe under normal conditions but found it
significant in the crisis period. The phenomenon of herding was documented in the PIIGS
economies and Continental markets during the global financial crisis and in the Nordic
economies during Eurozone crisis. Similarly, Economou et al. (2011) found herding
behaviour in the Global Financial Crisis for Greek, Italian, Portuguese and Spanish stock
markets for the daily data over the period 1998-2008. However, Demirer and Kutan
(2006) did not find herding in Asian Crisis for Chinese stock market.5 Guo and Shih
(2008) found herding behaviour in Taiwan high tech industries in comparison to the
traditional industries for daily returns.
The types of investors can also affect the herding behaviour. Investment analysts with
a good reputation are less likely to make decisions on the basis of their personal
information. They are more likely to engage in herding to meet investor expectations and
their reputation. But analysts with low reputation are not much concerned about their
reputation and thus more likely to perform on their private information. Chen et al.
(2008) found that qualified foreign institutional investors (QFII) imitate one another in
Taiwan market in comparison of individual and local institutional investors.6 Nofsinger
and Sias (1999) examined the significance of crowding for individual and institutional
investors. They found that herding behaviour of institutional investors had more effect on
price changes in comparison to individual investors using a data from NYSE. The results
of the Kim and Wei’s (2002) study showed that foreign investors were more involved in
herding behaviour than local investors.7 The study found that foreign institutional
investors were more engaged in herding for those equities which showed more profit in
the past months. Similar result for Korean market was documented by Choe et al. (1999).
Graham (1999) also proposed a reputational model of herding of mutual fund managers.8
76 F. Kiran et al.

Chen et al. (2003) found that absence of precise available information and dull
investment environment help in developing the herding behaviour of investors in
developing markets. In addition, Andersson (2009) found that transparent and improved
information could decrease the probability of herding. However, Ahsan and Sarkar
(2013) did not find herding effect for Dhaka Stock Exchange for monthly data over the
period (2005–2011) using both models of Christie and Huang (1995) and Chang et al.
(2000).
The study of Demirer and Kutan (2006) showed the absence of herding for Chinese
stock market, which is in contradiction to Chang et al.’s results which documented that
herding behaviour was more prevalent in developing economies. However, Lao and
Singh (2011) documented herding for Chinese and Indian stock markets, especially
during extreme market movements.9 In the Indian stock market, herding was higher
during the bullish trend while in Chinese exchange the herding was more in a bearish
market. Borensztein and Gelos (2003) found that herding behaviour is less significant
among closed-end funds but more pronounced in open-end funds in developing countries.

3.2 Evidence from Pakistan

The extant literature on herding behaviour reveals mixed results in Pakistan context. For
example, Javed et al. (2013) did not find herding for monthly data of firms listed on the
PSX using both methods of Christie and Huang (1995) and Chang et al. (2000), although
the value of γ2 was negative but not statistically significant. Similarly, Khan (2013) used
the data from 18 different sectors listed on the PSX using both methods of Christie and
Huang (1995) and Chang et al. (2000). The authors did not find herding for all sectors
using Christie and Huang (1995). However, they found herding in two sectors using
Chang et al. (2000) model. In addition, no proof of herding was found in extreme market
movements.
Latif and Shah (2014) studied herding behaviour in the mutual funds industry of
Pakistan. They used pooled variance technique to measure herding along with regression
method. Equity returns were taken as dependent variable while herding of funds was used
as an independent variable for monthly data of five years ranging from 2006–2010. The
study concluded that herding of mutual funds had a positive relationship with the equity
returns. Herding impact was documented for both buying and selling of stocks and was
more prevalent among institutional investors compared to individual investors as the
former have more awareness about the market and equities. Javaira and Hassan (2015)
analysed herding behaviour of investors using both daily and monthly data of KSE-100
Index ranging from the year 2002–2007. No evidence of herding was found in Pakistan
financial market in up-market conditions, however, during the down-market conditions,
they did find evidence of herding behaviour.
A more recent and comprehensive study on herding is by Shah et al. (2017) for a
relatively bigger sample of 609 firms listed on the PSX from 2004 to 2013. The authors
analysed herding from different facets including herding of all firms towards the market,
herding towards industry, herding of industry portfolio towards the market, and herding
of small and large firms and herding during the global financial crisis of 2008. They
found that individual firms do not herd toward the market; however, large firms show
herding in extreme upward movement of the market. Moreover, they found that
individual firms herd towards industry portfolios in many industries, however, industry
portfolio did not herd toward the market.
 The herding behaviour on Pakistan stock exchange 77

4 Methodology

The study uses daily data from January 2004 to December 2017 to find herding behaviour
in 663 firms listed on the PSX. The closing stock prices of companies have been taken
from www.OpenDoors.pk and www.psx.com.pk. Convenient sampling is used in the
study because companies from different sectors are selected on the basis of availability of
data ranging from 2004–2017. Hence, a final sample of 3465 observations is considered
for analysis. Previous studies in Pakistan have generally used KSE-100 Index as a
benchmark for market portfolios. In this study we use two measures of the market
portfolios: First, the daily percentage returns calculated from the changes in
KSE-100 Index. Second, we use average returns of all firms on a daily basis to make a
market portfolio. Such a bigger portfolio is likely to be more representative of the market
than the KSE-100 Index.
According to capital asset pricing model, inconsistent movement of individual
securities from the market returns results in greater dispersion of stocks under the
assumption of rationality. The potentiality of herding effect can be the consequence of
lower dispersion of stocks at the time of greater market movements. This research adopts
Christie and Huang (1995) and Chang et al. (2000) methods as a measurement of herding
in this research. During market stress (extreme downward market condition) herding
measure is higher than when the market has a bullish trend (Chang et al., 2000). In
extreme downward movement of the stock market, investors panic and try to save
themselves by engaging in crowding behaviour like other participants are doing, resulting
in lower dispersion in stock returns. The Pakistani market is characterised by volatility
and extreme outliers which is best controlled by CSAD (Akhtar and Khan, 2016);
therefore, we use CSAD as well to have more robust results. The dependent variable of
CSSD is used as a proxy for herding in Christie and Huang (1995) model and CSAD for
Chang et al. (2000).
Christie and Huang (1995) measured the average concurrence of market returns with
respect to individual stock returns by using CSSD. It can be estimated as follows:


n
n 1
 rj ,t  rt 2
CSSDt 
n 1

where, rj,t is the observed stock returns of firm j at time t, rt is the market portfolio
returns at time t, and n is the number of observations. Herding behaviour is tested by
regressing the CSSD of returns against the constant and two dummy variables. The
equation is:
CSSDt    1 DtU   2 DtL  εt

where Dtu (DtL) are dummy variables to represent up (down) movements in stock returns.
In this study, we use 1 to 5% increase (decrease) to represent extreme market conditions.
The dummy variable is Dtu = 1, if returns fall in extreme upper tail of the return
distribution or 0 otherwise. And DtL = 1, if returns follow in the lower tail of return
distribution or 0 otherwise. According to the method introduced by Christie and Huang
(1995), in case of extreme market conditions, an investor is likely to neglect personal
information and follow the herd. Hence investors make homogenous decisions and the
returns of individual stocks move towards the market return, which leads to the lower
78 F. Kiran et al.

dispersion of stocks from the market returns (Gleason et al., 2004). If herding happens,
the dummy variables will have negative and statistically significant coefficients.
A different technique was introduced by Chang et al. (2000) to detect herding
behaviour of firms. They used CSAD as a better measure of dispersion instead of using
CSSD. Chang et al. (2000) documented that the method presented by Christie and Huang
(1995) needs an explanation of what is meant by market stress. The CSSD of returns can
be significantly affected by the existence of outliers (Chang et al., 2000). As a result,
Chang et al. (2000) suggested the use of CSAD as a measure of return dispersion:


n
rj ,t  rt
11
CSSDt 
n

where rj,t is the observed stock returns of firm j at time t, rt is the market portfolio returns
at time t, and n is the number of observations.
Chang et al. (2000) design their model on the hypothesis that the linear relationship
between CSAD and market returns may not exist, rather the relationship can be
nonlinear. Chang et al.’s model show this nonlinear association through the following
equation:

CSADt    Y1 rt  Y2 rt 2t  εt

The equation for CSAD, compared to equation CSSD, proposed a nonlinear relationship
between CSAD and market portfolio returns rt 2 . A negative coefficient of Y2 would
indicate the presence of herd behaviour. However, under capital pricing model
assumptions, there exists a linear relationship between the market return and the
dispersion of stock returns. So, we can expect a positive value of coefficient Y1 in case of
absence of herding.

5 Analysis

In this section, we present descriptive statistics and results of the regression models. All
the tables in this paper were created using asdoc, a Stata program written by Shah (2018).

5.1 Descriptive statistics

Table 1 shows descriptive statistics of KSE-100 Index returns, all firms returns (663
firms), CSSD and CSAD for daily data for the period 2004-2017. The first two columns
are in 100 basis points. The mean daily return of KSE-100 Index is .064, which translates
into a yearly return of 16.128% (assuming 252 trading days). The standard deviation is
1.252 basis points per day, with a yearly value of 19.87. These two figures show that PSX
offered significant returns during the sample period with higher volatility. This has
remained one of the key feature of PSX (Akhtar and Khan, 2016; Khan, 2017) during the
last three decades.
 The herding behaviour on Pakistan stock exchange 79

Table 1 Descriptive statistics

Variables KSE-100 returns All-firms average returns CSAD CSSD

Observations 3,465 3,462 3,463 3,462
Mean 0.064 0.023 0.035 0.067
Standard deviation 1.252 2.958 0.026 0.041
Minimum –6.042 –26.492 0.000 0.000
Maximum 8.255 109.482 1.095 0.591
1st percentile –4.111 –5.887 0.000 0.000
99th percentile 3.445 4.622 0.096 0.234
Skewness -0.419 17.679 22.655 3.437
Kurtosis 6.291 614.345 836.915 25.352

5.1 Regression analysis

Tables 2 and 3 present results of Christie and Huang (1995) model where the dependent
variable is CSSD. These regression models are estimated for different levels of extreme
movements in the market portfolio returns, i.e., 1%, 2%, 3%, 4% and 5%. We use two
proxies for the market portfolio. The first proxy is the KSE-100 Index. Many studies in
Pakistan (see for example Abdullah et al. 2012) and elsewhere use market index as a
proxy for market portfolio. KSE-100 Index has 100 largest firms. However, we think that
our larger sample of 663 firms can be a better proxy of the market than mere 100 firms.
Therefore, we use average returns of these 663 firms as a proxy of the market portfolio.
We estimate separate set of regressions for each proxy. Table 2 reports results of the
regressions for the first proxy and Table 3 reports results for the second proxy.
Table 2 Results of Christie and Huang model for the period 2004–2017

Market movements by:

1% 2% 3% 4% 5%
Up-market (DU) 0.007*** 0.018*** 0.025*** 0.020** 0.030
(0.002) (0.003) (0.006) (0.010) (0.024)
Down-market 0.013*** 0.021*** 0.027*** 0.037*** 0.005
(DL) (0.002) (0.003) (0.004) (0.007) (0.029)
Constant 0.064*** 0.065*** 0.066*** 0.067*** 0.067***
(0.001) (0.001) (0.001) (0.001) (0.001)
Obs. 3467 3467 3467 3467 3467
R-squared 0.013 0.022 0.017 0.011 0.000
Notes: CSSD is the dependent variable. Market portfolio returns are proxied by the
percentage changes in KSE-100 Index. DU and DL are the dummy variables to
represent extreme market conditions.
Standard errors are in parenthesis. Significance is shown by ***p < 0.01,
**p < 0.05, *p < 0.1.
In Table 2, the coefficients for dummy variables DU (up market movements) and DL
(down market movements) are positive and statistically significant at different levels of
80 F. Kiran et al.

fluctuations, except when the market moves by 5%. This shows the nonexistence of
herding. Table 4 reports similar results as Table 2, with one difference that is both the
dummy variables are positive and statistically significant in all models. Since our data
period and number of stocks are very similar to Shah et al. (2017), we would like to
compare our results with theirs. Shah et al. (2017) also report similar results when they
test herding of individual firms toward the market portfolio. Since we use daily data and
Shah et al. use weekly data, our findings further lend support to the findings of Shah et al.
that herding does not exist in high frequency data of Pakistan.
Table 3 Results of Christie and Haung model for the period 2004–2017

Market movements by:

1% 2% 3% 4% 5%
Up-market 0.021*** 0.057*** 0.101*** 0.134*** 0.155***
(DU) (0.002) (0.003) (0.005) (0.006) (0.008)
Down-market 0.025*** 0.047*** 0.064*** 0.093*** 0.122***
(DL) (0.002) (0.003) (0.004) (0.005) (0.006)
Constant 0.061*** 0.063*** 0.065*** 0.066*** 0.066***
(0.001) (0.001) (0.001) (0.001) (0.001)
Obs. 3467 3467 3467 3467 3467
R-squared 0.055 0.126 0.162 0.189 0.183
Notes: CSSD is the dependent variable. Market portfolio returns are proxied average
returns of all firms included in the sample. DU and DL are the dummy variables to
represent extreme market conditions.
Standard errors are in parenthesis. Significance is shown by *** p<0.01, **
p<0.05, * p<0.1.
Table 4 Results of Chang et al. (2000)

CSAD Coef. St. err t-value p-value Sig.

rm 0.000 0.000 -0.53 0.595
absRm 0.004 0.001 2.96 0.003 ***
rm2 0.000 0.000 0.69 0.490
_cons 0.032 0.001 41.75 0.000 ***
Mean dependent var 0.035 SD dependent var 0.026
R-squared 0.023 Number of obs 3463
F-test 27.021 Prob > F 0.000
Akaike crit. (AIC) –15529.766 Bayesian crit. (BIC) –15505.167
Notes: CSAD is the dependent variable. Market portfolio returns are proxied by the
percentage changes in KSE-100 Index.
***p < 0.01, **p < 0.05, *p < 0.1
Tables 4 and 5 report regression results of Chang et al. (2000) model. These two tables
show similar findings as reported in Tables 2 and 3. The coefficients for absolute market
returns (γ1) and squared market return (γ2) are positive which imply the absence of
herding behaviour.
 The herding behaviour on Pakistan stock exchange 81

Table 5 Results of Chang et al. (2000)

CSAD Coef. St. err t-value p-value Sig.

rm 0.038 0.016 2.38 0.017 **
absRm 1.133 0.022 51.28 0.000 ***
rm2 –1.071 0.034 –31.84 0.000 ***
_cons 0.024 0.000 59.74 0.000 ***
Mean dependent var 0.036 SD dependent var 0.026
R-squared 0.443 Number of obs 3507.000
F-test 928.020 Prob > F 0.000
Akaike crit. (AIC) –17757.376 Bayesian crit. (BIC) –17732.726
Notes: CSAD is the dependent variable. Market portfolio returns are proxied average
returns of all firms included in the sample. ***p < 0.01, **p < 0.05, *p < 0.1.
This evidence of herding in this paper supports some of the other studies regarding
herding in Pakistan. Javed et al. (2013) investigated herding effect in Karachi stock
market by adopting the Christie and Huang (1995) and Chang et al. (2000) measures.
They found no evidence of herding in Pakistan stock market. Khan (2013) could not find
any evidence of herding in PSX by employing Christie and Huang (1995) and Chang et
al. (2000) measures. Javaira and Hassan (2015) examined herding in PSX by using
Christie and Huang (1995) and Chang et al. (2000) measures. These authors also fail to
find evidence in support of herding behaviour.
Many studies were unable to discover proof of herding in developing economies. The
results of this study do not support the finding of Chang et al. (2000) that herding is
present in developing economies like South Korea and Taiwan. In the herding literature,
there is a hypothesis that availability of timely and accurate information is an issue in the
developing countries which would force investors to make herds. Pakistan is a
developing country and because of family businesses, insiders’ ownership, block
holdings and lack of strong corporate governance, the information asymmetry problem
should be severe (Hussain and Shah, 2015), which should lead to more herding.
However, the results do not support these arguments.

6 Conclusions

This paper analyses herding behaviour of 663 firms listed on the PSX from January 2004
to December 2017. We use two famous models for herding behaviour: the Christie and
Huang (1995) model of CSSD and the Chang et al. (2000) model of CSAD. The
empirical results indicate an absence of herding on the PSX using both methods. The
absence of herding on the PSX, also reported by several previous studies, presents a
paradox. There are convincing theoretical arguments that developing countries are
characterised by poor access to accurate and timely information, therefore, investors can
gain more if they rely on information of others. Resultantly, there should be more herding
in developing countries. The evidence in this paper and others does not support these
arguments. Perhaps, future researches in Pakistan can use primary data to get the point of
view of individual and institutional investors.
82 F. Kiran et al.

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Notes
1 Crowding conduct is used interchangeably with herding behaviour.
2 Three categories of efficient market hypothesis exist: weak form, semi-strong and strong form
of EMH. The weak form information relies on the availability of past stock prices where
investors cannot predict future share prices on the basis of historical record. Therefore, the
price movement is haphazard. According to semi-strong form of EMH, stock prices not only
absorb past stock prices but also reflect public information. The strong form of efficiency
incorporates all information including public and private information. So investors cannot
even take advantage from insider information to beat the market (Fama, 1970; Khan and
Khan, 2016).
3 The Lahore stock exchange (LSE) was inaugurated on October 1970 according to the
Securities and Exchange Commission Ordinance 1969 of Pakistan. The Islamabad stock
market (ISE) came into existence in the capital city of Pakistan on 25th October 1989 (Khan
et al., 2016). In January 2016, the three stock exchanges are demutualised into single stock
market named PSX.
4 The four other indices are designed to cater to the needs of different stakeholders, i.e.,
KSE-All shares index, the KSE-30 index and the KMI-30 index.
5 The authors used both individual firm and sector level data over a period 1999-2002. They
also make distinction between the firms listed on Shanghai and Shenzhen stock markets at the
sectoral level.
6 Data had been extracted from Taiwan economic journal ranging from January 2002 to
December 2006. It consists of all companies listed on Taiwan Exchange and Gretai OTC
market.
7 The authors employed the Lakonishok et al. (1992) model of herding in Korean stock
exchange (KSE) for a monthly data ranging from December 1996 to June 1998.
8 Graham (1999) used data from analysts who announces investment newsletters over the period
ranging from 1980-1992 and it also incorporates 5293 suggestions made by 237 investment
magazines.
9 The data contains top 300 firms from both Bombay and Shanghai exchanges over the period
from July 1999 to June 2009 using the dispersion approach of CSAD.

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