The Effects Of Herding Behavior On Portfolio Returns At The Nairobi Securities Exchange

Abstract

Investors have a tendency to herd by making similar decisions or by mimicking the actions of others instead of making their own informed decisions. They end up making irrational decisions clinging on the belief that the crowd cannot be wrong. Information asymmetry could also explain the presence of herding behavior which is against the Efficient Markets Hypothesis. The main objective of this research was to investigate the effect of herding behavior on the portfolio returns at the Nairobi Securities Exchange. The study entailed the descriptive research design. Secondary data was obtained from the NSE historical database which constituted of the daily prices data for the period between January 2010 and December 2015. The NSE 20 Share Index was used as a sample. Portfolio returns were computed and the regression analysis of the returns computed to test for herding. Cross-sectional absolute deviation model by Chang, Cheng and Khorana (2000) was used to test the presence of herding where the γ2 coefficient was expected to be negative. The regression coefficient γ2 was found to be positive therefore indicating no presence of herding or its effect on portfolio returns at the Nairobi Securities Exchange.