Does Regime-Dependent Volatility Drive Dynamism in Investor Herding?

Komal Jindal  
Meera Bamba
Mamta Aggarwal

Abstract

The existing literature on herding often uses the static model to test herd behaviour in the Indian market context. Hence, the objective of this paper is to investigate the dynamic herd behaviour for S&P BSE 500 from 2009-2023 using the Markov Regime Switching model. Results exhibit the occurrence of three regimes, namely, high, low, and extremely volatile regimes. Findings suggest that the Indian market moves into the order of low, high, and extreme volatility (LHC), similar to other developed countries. This has implications for investors to either exit from the market or reframe their portfolio through hedging techniques before the market enters into extreme volatility. Moreover, the results exhibit anti-herding in high and low-volatile regimes. Our study discloses the presence of herding in crashes or extremely volatile regimes, showing that Indian investors start following each other during crash-like situations. This research is significant for individual investors, portfolio managers, and stock market regulators.

Keywords: Dynamic Herding, Indian Equity Market, Three Regime-Switching Model, Volatility Regime, Markov Model

Volume 15, Issue 1
June 30, 2024
Pages: 54-79

DOI: https://doi.org/10.4038/cbj.v15i1.169

Suggested citation:

Jindal, K., Bamba, M. & Aggarwal, M. (2024). Does regime-dependent volatility drive dynamism in investor herding? Colombo Business Journal, 15(1), 54-79. https://doi.org/10.4038/cbj.v15i1.169

Komal Jindal
Department of Commerce, Indira Gandhi University, India
komal.comm.rs@igu.ac.in

Meera Bamba
Department of Commerce, Chaudhary Bansi Lal University, India

Mamta Aggarwal
Department of Commerce, Indira Gandhi University, India