Empirical Models of Herding Behaviour for Asian Countries with Confucian Culture

• Main Author: Batmunkh Munkh Ulzii
• Other Authors: Chen, Shieh Liang
• Format: Others
• Language: en_US
• Published: 2016
• Online Access: http://ndltd.ncl.edu.tw/handle/46785332761553063596

博士 === 亞洲大學 === 經營管理學系 === 104 === Purpose: Previous studies have devoted much effort on investigating herding behavior in equity markets. However, their findings not only tended to become homogeneous, but also stayed at the surface level of the problem. The purpose of this study is to investigate the insights of herding behavior in the Confucian markets by conducting a set of empirical tests. More specifically this study investigates a sample of 7 countries and 13 markets to gain a deeper understanding of the causes of herding behavior and the potential factors that cause investors to behave in a group manner. Furthermore, this study investigates the relationship between managerial decision making processes in Confucian culture. Methodology: Following a comprehensive review of the existing methodologies on herding behavior this study employs return dispersion approaches and herding tests developed by Christie and Huang (1995), Chang, Cheng, and Khorana (2000), and Tan, Chiang, Mason, and Nelling (2008). Thus, the foundation of empirical models of this study is based on these return dispersion methods and herding tests. This study investigates a sample of 13 stock markets of seven Asian economies with 10 different hypotheses. Those economies, which are considered to have Confucian culture, are mainland China, Hong Kong, Japan, South Korea, Taiwan, Singapore, and Vietnam. The hypotheses of this study aim to investigate formation of herding behavior in different market and economic circumstances. In testing the empirical models, this study uses OLS regression for the main test as well as regression with Newey-West (1987) for the robustness test of each result from OLS regression analysis. Data of this study consists of 13 index returns (Shanghai A and B share, Shenzhen A and B share, Hang Seng index, NIKKEI225, TOPIX, KOSDAQ, KOSPI, Straits Times Index, TAIEX, and indices of Hanoi and Hochimin city Stock Exchanges) and returns of their constituent stocks. Moreover, to test behavioral pitfalls and monetary policy effects, this study adopted trading volumes, market values, prime lending interest rates, and exchange rates. The time period of the sample data is from January 01, 1999 to December 31, 2014. All data were collected from the Thomson Reuters Datastream database. Findings: In order to investigate the insights of herding behavior among Confucian markets, this study proposes and tests 10 different hypotheses. According to the empirical findings, all hypotheses are accepted. The breakdowns of the findings are as follows: First, the sample markets demonstrate significant herding behavior in general and significant herding behavior in different markets conditions such as in rising-falling markets, high-low trading volumes and high-low market volatility. Second, the sample markets reveal significant cross-market herding effect. Further investigation of the results suggest that the cross-market effect exists in direction from advanced markets (Japan, Singapore, and Hong Kong) toward emerging markets (China, Taiwan, South Korea, and Vietnam). Third, the sample markets disclose significant effects on herding tendency due to events, such as the global financial crisis 2008 and Chinese New Year. Fourth, about 35% of the sample markets exhibit significant lower herding tendency when the markets were characterized by excessive optimism, and 90.9% of the sample markets exhibit significant lower herding tendency when they were characterized with overconfidence. Fifth, there is a significant inverse herding tendency, which is expressed with the expanding return dispersion, when the volatility of interest rate and exchange rate is high. Finally, results of the robustness test shows highly significant herding behavior during the extreme market movements, which also gives a strong support to our empirical findings. Contribution: This study has three major contributions to the literature of herding behavior and the link between herding behavior and cultural aspects. First, this study uses dataset of 13 Confucian stock markets of seven Asian economies, with time range from 1999 to 2014. Second, this research developed and tested 10 different hypotheses along its main purpose, and most importantly all of them are accepted. However, previous studies examined Confucian markets separately with different time periods; no study brought all of them together into the set of empirical examination under the same and this long time period. But this study did, which appears to be the first two contributions of this study to the literature of behavioral finance. Third, this study adds the new dimension of the cultural aspects in order try to explain the root causes to herding behavior among investors in the equity markets. Recognizing that the Confucian culture appears to be one of the most influential cultural aspects in management, this study examines herding behavior of Confucian culture in stock markets under the umbrella of one empirical study. According to the findings of this study, Confucian culture has a positive and significant effect on herding behavior among investors in equity markets. There is no study examined investors` herding behavior in terms of Confucian culture at any level. However, this study did, and found significant positive results. This is the most important contribution of this study to the existing body of literature on herding behavior. Suggestions: This empirical study emphasizes on herding behavior in Confucian culture in linkage with the CNY influence. Thus, future studies are advised to employ more diverse methods, such as survey analysis or experimental design, to go for more deliberate findings. Limitations: Data limitation issues made some of the empirical models to exclude markets of Vietnam from the empirical testing. Data from some markets, such as STI of Singapore Exchange, tracks from 1973, however for some markets, the data fades even during 1990s. The Thomson Reuters Datastream database is the only source of data for this study.