Investigating the Relationship between Herding Behaviour and Liquidity in the Johannesburg Stock Exchange

Abstract

This paper examines the relationship between herd behaviour and liquidity in the South African equity market using a sample of 302 companies listed on the Johannesburg Stock Exchange, over the time period from 1996 to 2019. The study employs the herding measures proposed by Christie and Huang (1995) and Chang et al. (2000), while the well-known Amihud (2002) measure of illiquidity, combined with the adjustment from Karolyi et al. (2012), is used to measure liquidity. Daily and monthly data samples are used to ensure a comprehensive study of the short and long term effects of the herding relationship. When both measures of herding are used, the results indicate no evidence of herding over the period studied, and furthermore there is no significant evidence of herding when conditioning on high, average and low levels of liquidity. Additionally, we find that trading volume cannot trigger herding behaviour, even in liquid market conditions, and thus the empirical analysis suggests that herding is not present in the South African equity market. We also find that by applying Granger causality tests, there are no causal links between herding behaviour and liquidity. JEL Codes: G1, G4