Asymmetric Effects and the Herd Behavior in the Australian Equity Market

Abstract

The purpose of this paper is to investigate whether Australian stock investors do herd. A sample of the largest251 Australian listed firms is employed from the beginning of 2003 until the end of 2010 on daily and monthlybasis. When the CH approach is used, no evidence of herd behavior for the daily and the monthly return series ofAOI and S&P300 indices is reported. However, the application of the CCK provides better results than thoseobtained by the cross-sectional stock price’s model developed by CH. According to CCK, in normal conditions,the conditional CAPM specifies a linear relationship between CSAD and market returns. However, if herdingoccurs during periods of market stress, then a nonlinear relationship will also exist. To accommodate for thepossibility that the degree of herding may be asymmetric in the up and the down markets, the CCK approach isapplied by examining the nonlinear relationship between CSAD and market returns. Evidence of herding isfound in the up and the down markets for both indices. This indicates that Australian investors exhibitasymmetric herding with respect to financial crisis, while they do not exhibit asymmetric herding in terms offundamentals. Findings show evidence of herding asymmetry created by trading volume only in high volumestate for both indices returns. However, in high volatility state, evidence of asymmetric herding is found for onlythe AOI monthly returns. This suggests that Australian investors remain in showing herding activities on dailyand monthly basis and are affected by the decisions of investors in foreign markets of the US, the UK and China.

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