The Power of Bad to Cause Herding Behaviour in the Market: An Empirical Analysis from Istanbul Stock Exchange
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The traditional Financial Economics theories argue that information plays a significant role for price formation in the market. Empirical studies in the field of Psychology and Neuroscience proved that information can be divided in to bad, good and neutral information and bad information has a strong as well as a dominant effect than positive and neutral information. Whereas, empirical studies in the field of Behavioural Finance shows that investors’ psychology has a significant impact in the process of price formation. In line with these findings, the objective of this study is to examine herding behaviour of investors in Istanbul stock exchange using intraday data. The study period covers from the beginning of 2006 to the end of 2018, and the data is collected from Finnet. The empirical finding indicates that herding is more prevalent when the market return falls and it is also dominant in the first half (first session) of a trading day or in the morning than afternoon. This empirical finding shows that whether the cause of negative market return is information or non-information sources, investors herd the market consensus when the market return falls. And this finding shows the existence of an asymmetrical investors’ behaviour in Istanbul stock exchange. To explain the implication of the findings I use the negativity effect theory in that negative information or event has a stronger effect than positive information or event.
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