Understanding investors’ behavior in stock exchange and crude oil Market was a significant challenge faced by researchers and experts as well as policy makers
Understanding investors’ behavior in stock exchange and crude oil Market was a significant challenge faced by researchers and experts as well as policy makers. During the last half century, it played a very important role in the economic development of both oil importing and exporting countries, sometimes providing investor the clues to predict the future performance of the stock market in these countries. The bubbles in oil prices and crises during the second half 2008 have led researcher as well as market policy maker to take closer into the behavior of traders in stock market and crude oil market.
The non-ef?ciency of stock markets gave growth to the development of behavioral ?nance theory. According to the Classical ?nance view, we assume that investors in the market are well informed and make the right decisions. However, because of psychological factors, these assumptions are void. Financial decision-making is affected by emotional factors, and investors make irrational decisions. These irrational or illogical decisions lead to biases, which can affect investor behavior.
Classical finance theories have been challenged by evidence of the violation of rational expectations (Markowitz, 1959) and the market efficiency (Fama, 1965) hypotheses. Research has been changed from classical approach to the behavioral approach in which the price of the assets are affected by the behavior of the investor and the herd behavior is one of most frequently.
Nevertheless, it turns out that investors mostly follow what others do in the market and ignore their own information, it is known as herding behavior. Many scholars had tried to explain the phenomenon within the framework of rational approach from different perceptions, such as market signal uncertainty and information cascade, reputation and fund manager’s payment.
Welch (1992) de?ned herding as a correlated behavior between the individuals. Avery and Zemsky (1998) de?ned herding as a suppression of individual opinions in favor of the direction of the crowd.
In last 10 years there had been many research as (Z. Dong et al,2010) had proven that if market makers and traders are homogeneous, herd behavior will never happen even if ambiguity exists; if traders have different approaches to ambiguity from market makers, then herd behavior will happen with a positive probability. This is one of the reasons behind stock price bubbles.
The herd behavior were test in the Pakistan stock market in period 2002 to 2007 in the study they found that it were not supporting for the rational asset pricing model and investor behavior found inefficient and it also denied proved evidence of herding behavior due to market return asymmetry, high and low trading volume states and asymmetric market volatility. (Javaira & Hassan, 2015). Malik and Elahi (2014) found signi?cant evidence of herding behavior in Pakistani stock market during extreme market movements.
In the Period 2004 to 2013 the Pakistan Stock Market the individual firms do not herd towards the market index, except when the market experiences a return of –5%.But when sort firms into groups small and large based on market Capitalization it indicate that large firms shows herding behavior in extreme market movement ( Din Shah et al.,2017).
1.2 Problem Statement:
There have many studies done on this topic of herding behavior like the effect of crude oil prices on the GCC stock market herd behavior of investor, examine the equity return dispersion with in industry portfolios and each market study showed the crude oil prices had significant effect on the trader in the stock market except for Qatar and Oman(ulussever & demirer,2017).
Herding is present in the French market during crises, and it is present in only some sectors during the entire period (2000 to 2016). The main trigger for investors to board into a collective herding movement differs from one sector to another. Furthermore, herding behavior has an preventing effect on market conditional volatility (Litimi, 2017).
In the Pakistan stock market during 2002 to 2007 study was conducted which showed the herding behavior does not exist in the stock market(Javaira & Hassan, 2015).but Malik and Elahi (2014) found signi?cant evidence of herding behavior in Pakistani stock market during extreme market movements who tested herding behavior in daily share prices of ?rms for the period 2003–2013 during bullish, bearish and normal market trend. But in other research done in Pakistan stock market herding behavior exist only in large firms in extreme movement in market (Din Shah et al., 2017). There had Many research but none of them Explore the Cross herding behavior between Pakistan Stock Exchange and Crude oil market.