Academic journal article Academy of Accounting and Financial Studies Journal

Herd Behavior and Market Stress: The Case of Malaysia

Academic journal article Academy of Accounting and Financial Studies Journal

Herd Behavior and Market Stress: The Case of Malaysia

Article excerpt


This paper examines herd behavior under an extreme market stress environment of the Malaysian stock market which was badly hit in the Asian financial crisis. The cross-sectional standard deviation of returns, or dispersion, covering a period of ten years' monthly prices of all stocks from January 1992 to December 2001 are used to capture the presence of herd behavior. Interestingly, evidence of herding behavior of Malaysian market participants was prevalent in extreme lower market stress context and financial crisis (bearish) period. This result contradicts the findings of herd behavior as documented by Christie and Huang (1995). On the other hand, the results also revealed that Malaysian investors acted according to their own opinions during periods of upper market stress as indicated by positive coefficient and they did not let their investment decisions be influenced much by the collective actions of the market. Insightful and related financial events associated with market stress contexts are described.


Herding exists everywhere, not only in the animal world but also human daily life; especially when making investment decision. Karguine (2003) believes that "experts tend to herd if they can communicate among themselves". As investors like to seek advise from these experts, they will then be influenced and led by the herding to similar directions. It is not surprising to know that word-of-mouth communication and contagion of ideas may sometimes happen rapidly. "A fundamental observation about human society is that people who communicate regularly with one another think similarly" (Shiller, 2000, p.148). Baruch (1958) described the stock market as follows:

What registers in the stock market's fluctuations are not the events themselves but the human reactions to these events, how millions of individual men and women feel these happenings may affect the future. Above all else, in other words, the stock market is people.

The 1997 Asian financial crisis which drew global attention and debate was partly due to the herd behavior of human beings (Jomo, 1998). Herding also occurred among newsletter analysts (Graham, 1999) and security analysts (Welch, 2000). Analysts and investors tend to be part of the herd and being in a herd can help them to share the blame for mistakes they make. However, there is little attempt on herd behavior within the contexts of bullish and financial crisis periods. Instigated by Malaysian stock market's uniqueness as well as its extreme experiences of market bullishness and financial crisis in the 1990s, it is interesting to examine the herding behavior in extreme up and down market movements, bullish, and financial crisis periods. This paper provides evidence to the current literature of herding behavior within various extreme market stress environments in an emerging stock market.


Researchers have devoted considerable effort in examining the investment behavior of market participants. Previous evidences indicate herding is a common behavior in the capital market. Asch (1952) had conducted an experiment which indicated that people rationally took into account the information revealed by others' actions. These findings are further reinforced by Jost (1995) that the tendency for people in groups to think and behave similarly seemed to suggest some kind of irrationally, such as a loyalty induced psychological motivation to be in accord with group members. Thus, they tend to observe others before making their own decisions.

The survey conducted by Shiller and Pound (1989) indicated that herding behavior existed among institutional investors. They found that institutional investor put emphasis on the advice of other professionals in making their investment decisions in volatile stocks. Lakonishok, Shleifer, and Vishny (1992) examined the impact of institutional trading on stock prices. The results revealed only weak evidence of herding decisions by institutional investors among small capitalization stocks. …

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