Does macroeconomic environment stimulate herding behaviour among investors in Malaysia stock market? an empirical evidence

Abstract

Herding behaviour could cause stock prices to deviate from the fundamentals, resulting in market instability. One of the influencing factors that stimulate herding behaviour amongst investors is macroeconomic environment. Among the major macroeconomic variables that play important role in influencing herding behaviour are economic growth, exchange rate, interest rates and inflation rate. However, empirical evidence on this is still lacking especially in the case of emerging markets such as Malaysia.

Therefore, the main objective of this paper is to empirically examine the influence of macroeconomic variables on the existence of herding behaviour in the Malaysian stock market.  In this study, two measures of herding behaviour have been used: Cross-Sectional Standard Deviation (CSSD) and Cross-Sectional Absolute Deviation (CSAD).  The estimation used daily data of 346 companies listed on the Malaysian stock market from the year 2000-2019. The regression estimation results using CSSD with individual macroeconomic variable found that herding behaviour is detected in the case of interest rate and inflation.

Meanwhile, for CSAD, the results demonstrate that herding behaviour is present in the case of interest rate, inflation rate and growth. Meanwhile, for the regression that consists of all macroeconomic variables, both measures are negatively and significantly related to interest rates and inflation rates. The findings offer additional evidence in supporting the existence of herding behaviour in Malaysia under the influence of selected macroeconomic variables.  Therefore, establishing better routes for economic information dissemination could assist investors to make a better investment decision. With a better understanding about herding behaviour could assist regulators to detect price efficiency issues hence to maintain market stability and efficiency.