Herd Behavior and Asset Pricing in the Indian Stock Market

IIMB Management Review, Forthcoming

Posted: 27 Mar 2017 Last revised: 24 Nov 2019

See all articles by Yash Chauhan

Yash Chauhan

Delhi Technological University

Nehal Ahmad


Vaishali Aggarwal

GGS IP University

Abhijeet Chandra

Vinod Gupta School of Management, IIT Kharagpur

Date Written: January 25, 2017


Investor behaviour has for long been a topic of interest for economists, portfolio managers and several other market participants who are keen to ascertain the role of investor psychology in market microstructure and price discovery process. Literature on financial economics suggests that market participants tend to suppress their own information and try to imitate others in the market, thereby herding against their private information. This tendency is attributed to risk aversion characteristic of economic agents that rely more on short cuts and heuristics in order to avoid risk of losing time required to incorporate private information. Such a tendency also results in the asymmetric expected returns on assets. We attempt to find empirical evidence of herding in two different cross-sections of financial markets using cross-sectional deviations of stock returns to measure the dispersion of individual stock returns from average market return. Using a unique dataset of daily stock returns from January 2011 to December 2015, we examine the small and large-cap stocks for the effect of herding. We study the existence of herding in two cross-sections of stocks in the Indian stock market and show that stocks with robust fundamentals observe little or negligible evidence of herding while vulnerable stocks are evidently found to be affected by herding. While examining herding, we show whether the cross-sectional dispersion of stock returns in large-cap stocks are lower compared to that in small-cap stocks, implying stocks with higher market cap and trading volume are less prone to herding.

Keywords: Behavioral Finance, Herding, Asset Pricing, Multi-Factor Model, Indian Stock Market

JEL Classification: G01, G12, G15

Suggested Citation

Chauhan, Yash and Ahmad, Nehal and Aggarwal, Vaishali and Chandra, Abhijeet, Herd Behavior and Asset Pricing in the Indian Stock Market (January 25, 2017). IIMB Management Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2940823

Yash Chauhan

Delhi Technological University ( email )

Shahbad Daulatpur,
Main Bawana Road,
Delhi, Delhi 110042

Nehal Ahmad

Independent ( email )

Vaishali Aggarwal

GGS IP University ( email )

New Delhi

Abhijeet Chandra (Contact Author)

Vinod Gupta School of Management, IIT Kharagpur ( email )

Kharagpur, 721302

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