Investors tend to follow others for comfort that comes from following market consensus. Because acquiring additional reliable information can be hard and costly, investors often follow the actions taken by others so as to avoid making errors themselves.

Empirical studies on herding behavior have yielded conflicting findings. Vidal-Tomas et al. (2012) have reported finding inconsistent herding patterns between animals.

What is Herding?

Herding refers to the behavior of investors to imitate those around them during times of market instability or crisis, often with the desire of reducing uncertainty and market volatility. Herding may put financial systems at risk by increasing joint failure among herding institutions.

Existing empirical data demonstrate that herding is more prevalent in emerging markets than developed ones, while some scholars claim it becomes even more apparent during bear days and crises.

This study explores the impact of herding in Malaysian conventional and Shariah-compliant stocks listed on CSI-300 and B-share indices, finding herding more evident during bull markets than bear markets and finding nonlinear decreasing correlation between CSADt=a+b1(1-D)Rm,t and squared market return with negative coefficients in Equation (11)(11)CSADt=a+b1(1-D)Rm,t+b2Rm,t+b3Rm,t2+b3Rm,t2 g1 is significant while low herding index values suppress stock market volatility furthermore; thus results suggest emerging markets exhibit greater herding during bull markets than during bear markets.

Herding in Upmarket

Researchers commonly study herding behavior using data collected from numerous investors. Their methodology involves looking at correlations among investors from different industries during times of extreme market movement; and then evaluating any herding behaviour observed among these investors based on these results of the research.

Herding tendencies of investors appear asymmetrically across up and down markets, suggesting their herding behaviors differ in response to different market volatility levels.

Herding behaviour among investors may be attributable to their ease of gaining information when the market is rising rather than when it is falling; as a result, investors may follow its trends more readily when the markets are rising than when markets are declining; consequently they tend to follow and imitate decisions made by fellow investors during upmarket periods. It should be remembered that herding does not always imply similar investment decisions by groups.

Herding in Downmarket

Studies demonstrate that herding tends to be most evident during a down market, due to irrational herd behavior driven by investors’ irrational expectations for stock price rise, wishful thinking, considering other people’s judgments and pressure to conform (Bikhchandani et al. 2000; Pedraza et al. 2021).

Herding behavior in down markets can also be caused by COVID-19-induced financial market uncertainty. Herding is most noticeable in less developed markets that lack liquidity and transparency.

Herding can be identified in down markets by analyzing daily and monthly returns of CSAD and stock indices. Table 1 presents a descriptive statistical analysis of herding and stock return indices during both pre-pandemic onset and COVID-19 pandemic periods across markets, where statistically significant herding occurred both daily and monthly frequency for all indices studied.

Herding in Low Volatility Periods

Herding refers to investors’ tendency to follow others during times of low market volatility. A prime example was dotcom stock’s overinflated valuation in late 90s which resulted in steep investment losses as the bubble burst.

Papadamou and Sias (Citation2021) find evidence for an asymmetric herding behavior among stock returns, where herding is more evident during up markets with low volatility periods and at periods with no price volatility spikes; their findings support momentum trading theories as being possible sources for herding’s effects.

Herding has also been found to be stronger in industries impacted by COVID-19, including energy and health care. Espinosa-Mendez and Arias (Citation2021) postulate that herding may be due to economic uncertainty; when this is present investors tend to copy what other informed agents are doing in order to mitigate market risks by following other informed agents – an observation corroborated through Granger causality tests and Johansen’s vector error correction model.