Asymmetric Effects and the Herd Behavior in the Australian Equity Market

Mohammad Q Al-Shboul


The purpose of this paper is to investigate whether Australian stock investors do herd. A sample of the largest
251 Australian listed firms is employed from the beginning of 2003 until the end of 2010 on daily and monthly
basis. When the CH approach is used, no evidence of herd behavior for the daily and the monthly return series of
AOI and S&P300 indices is reported. However, the application of the CCK provides better results than those
obtained 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 herding
occurs during periods of market stress, then a nonlinear relationship will also exist. To accommodate for the
possibility that the degree of herding may be asymmetric in the up and the down markets, the CCK approach is
applied by examining the nonlinear relationship between CSAD and market returns. Evidence of herding is
found in the up and the down markets for both indices. This indicates that Australian investors exhibit
asymmetric herding with respect to financial crisis, while they do not exhibit asymmetric herding in terms of
fundamentals. Findings show evidence of herding asymmetry created by trading volume only in high volume
state for both indices returns. However, in high volatility state, evidence of asymmetric herding is found for only
the AOI monthly returns. This suggests that Australian investors remain in showing herding activities on daily
and monthly basis and are affected by the decisions of investors in foreign markets of the US, the UK and China.

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