Determinants of Industry Herding in the Indian Stock Market

Abstract

Herding can cause stock market volatility and its presence among foreign institutional investors (FIIs) can severely affect the equity market. Therefore, this research endeavors to estimate the industry-level herding by FIIs. Further, repercussions of trading volume, industry returns, and conditional volatility on herding have been analyzed in the study. In addition, the level of FIIs herding has been estimated during upswing and downswing markets, rising and falling trading volume, and conditional volatility market states. Herding was estimated using a count-based herd ratio after the global meltdown period. The empirical findings are based on the daily data from January 2010 to December 2019. The results confirmed herding in the Indian equity exchange. The outcomes revealed that buy-side herding was more predominant than sell-side herding in all industries. These findings indicate that the Indian security market is a lucrative investment destination for FIIs. The research disclosed that industrial returns are a vital parameter to derive FII herding. Therefore, this research can be used for price discovery at the industry level. Trading volume and conditional volatility demonstrate an inverse relationship with FIIs herding. Furthermore, the research also reveals that herding was more severe before the structural break period except for the construction sector.