Herding Behavior and Its Effect on Stock Market Performance in Kenya

Abstract

The study was aimed at finding out the relationship between investor herding and performance of quoted equities in Kenya. The study has three specific objectives which include; to determine the relationship between investor herding, represented by value of shares traded, and performance of the NSE equity market; to determine the relationship between investor herding represented by volume of shares traded, and performance of the stock market; and to try and give recommendations drawn from research findings. The main objective of the study is to provide investors, policy makers and the academic community with knowledge of the relationship between investor sentiment and equity market performance. The study used two proxy measures of investor herding against market capitalization as an indicator of stock market performance. The two proxies for investor herding include the volume of shares traded and value of shares traded. The study is based on Calderon-Rossell (1991) behavioral model of stock market performance and Error Correction Model. Herding measure will be based on the factor sensitivity to volume. To begin we will apply the security market line against the trading volume and value. This study used quarterly time series data for the time from 2010 to 2014. The results indicate that there is a relationship, both long-run and also short run, between the indicators of investor herding and NSE performance. The study therefore recommends that investor confidence in Kenya be developed further to expand market capitalization to minimize the effect of herding.