Traditional Value Investors’ Herding Behaviour in Environmental,Social and Governance Stock Portfolio: Bounded Rationality and Market-phase Asymmetry Across Southeast Asia Emerging Markets

Abstract

This study examines herding behaviour among traditional value investors in Environmental, Social and Governance (ESG) portfolios across Southeast Asian emerging markets, defined by reliance on a single valuation metric (the market-to-book ratio). It challenges prior literature that examined undifferentiated investor populations and reported generalized resistance to herding in ESG portfolios. We argue that bounded rationality drives these investors to simplified analysis, triggering information cascades and rational herding. Using daily returns (2017–2024) from five markets, we apply a nonlinear cross-sectional absolute deviation model with a Generalized Autoregressive Conditional Heteroskedasticity robustness check to control for volatility clustering and isolate rational herding from common-information drivers. Results show traditional value investors exhibit significant herding conditional on market phase, contrary to aggregate-level analyses. We identify notable market-phase asymmetry: shock-driven reactions during bear markets (years of negative regional index returns) contrast with momentum-chasing behaviour during bull markets, highlighting the complementary roles of bounded rationality and information cascades. Our study advances herding literature by showing investor type matters, proposing a joint bounded rationality-information cascade explanation for rational herding, and revealing market-phase dependencies. As herding behaviour amplifies valuation distortions by driving prices from fundamental value, practically incorporating these patterns into risk models may help mitigate such distortions.