There are only studies carried out on herding behavior in Bangladesh equity market.
The first study was
conducted by Ahsan and Sarkar (2013) for the period 2005-2011 and the second study was done by
Khan and Imam (2023) examined herding behavior in equity prices of 160 companies for the period
2007-2011
The data set used by both studies is confined to a relatively small set of observations and included a few
companies. Our research contains a large data set spanning from 2012-2021 on all companies listed on
Dhaka Stock Exchange (DSE).
All previous empirical research on herding behavior has classified the equity market as a bullish one
when the market return is positive on a day, and a bearish market when it is negative. Our research
makes a remarkable contribution to the existing herding literature in the equity market by introducing
an innovative approach to determining bullish and bearish market phases based on the principles of the
Dow Theory. Not a single prior research on herding behavior all over the world has applied the Dow
Theory framework to segregate bullish and bearish markets. Therefore, this distinct market classification
extends an unfaded methodological developments to understand the dynamics of investors behavior
during different market conditions.
Prior empirical research has predominantly examined asymmetric pattern in herding behavior
conditioned on market directions, high or low trading volume, and high or low market volatility in the
context of entire market period. Our research makes a significant contribution to the literature by
delineating asymmetric herding patterns within each market classification developed in this research
such as bullish, bearish, crisis, extended crisis, and Covid-19 markets, which may provide valuable
insights into the differential dynamics of investment behavior of market participants across these
markets.
Secondly, employing a large data set enables us to investigate herding behavior of investors with respect
to two specific crisis events. The first crisis resulted from an endogenous shock created from a massive
equity market crash that happened in 2011. The second crisis originated as a result of an exogenous
shock due to the global Covid-19 pandemic.
Thirdly, our research extends methodological improvement by comparing the efficacy of cross-sectional
standard deviation (CSSD) and cross-sectional absolute deviation (CSAD) as measures of equity return
dispersions. We attempt to ascertain whether these two return dispersion measures explore potential
differences in their absorptive capacities to capture and characterize the dynamics of investors’ herding
behavior in the Bangladesh equity market.
Introduction Methodology
In this chapter, we delineate the results of empirical analysis on herding behavior among market
participants in the Bangladeshi equity market. The chapter commences with an overview of descriptive
statistics and stationarity tests to understand the nature of the data characteristics. Subsequently, we
will demonstrate the interpretation of various empirical methodologies employed in this research to
provide insights into the dynamics of herding tendencies of market participants in our equity market.
Finally, this chapter will provide a comprehensive understanding of the potential avenues for future
research and the practical policy implications of market functioning in the context of Bangladesh equity
market
Dow Theory identifies the bull market when each successive trend surpasses the previous one, and each
reaction creates a higher level than the preceding one. In contrast, a bear market is depicted
when each intermediate reaction rally stops at a lower level than the preceding one, while each
uptrend rally reaches successively lower levels.