Market Herding in Uptrends and Downtrends: Evidence from the Emerging Stock Exchange of Nepal

Abstract

This study investigates herding behavior across various market conditions in the Nepalese stock market, illuminating the dynamic market atmosphere during uptrends and downtrends, as well as firm size. We analyze daily and monthly security prices, utilizing quantitative methods—cross-sectional standard deviation (CSSD) and cross-sectional absolute deviation (CSAD)—to assess herding behavior. Contrary to some established findings, evidence of herding is found during uptrends, while no such likelihood occurs in downtrends. Notably, both long-term and short-term herding tendencies are observed based on exclusively small-sized enterprises, revealing unique market psychology. The findings of this research are robust, even when separating the COVID-19 pandemic period observations. This research also demystifies the reasons behind herding behavior in specific market conditions in Nepal and offers practical insights for investors and regulators to mitigate the bias. Further studies could explore utilizing primary data to shed light on sustained herding mechanisms in small firms and consider sector-specific portfolios over extended periods for a deeper understanding of these market dynamics.