An Examination of Herd Behavior: Evidence from Saudi Arabia Stock Exchange

Abstract

Abstract This research study seeks to determine if herding behavior exists among publicly listed companies in the Saudi Arabia stock exchange market at a sectoral level. To measure herding behavior, the study employs the Cross-Sectional Absolute Deviation (CSAD) of returns and Modified Cross-Sectional Absolute Deviation (MCSAD) models which include trading volume. The analysis utilizes daily data for 215 companies across 20 sectors from January 1, 2018, through December 31, 2022. Two Hypotheses are examined and empirically confirmed. The first hypothesis is that herding behavior exists in the Tadawul. The second hypothesis is that the incorporation of volume data in the analysis enhances the accuracy in identifying herding behavior in the Saudi Arabia stock market, as trading volume is a crucial factor that influences herding behavior in the financial market. The results reveal that almost half of the market sectors exhibit signs of herding behavior, with some sectors being more susceptible to this behavior than others. Additionally, the study also demonstrates that trading volume has a key role in foretelling herding behavior in the Saudi Arabia stock market. This research adds a lot to our understanding of herding behavior in the Saudi Arabia stock market by highlighting the importance of trading volume as a key factor in predicting the occurrence of this phenomenon. The study’s conclusions may have a big impact on investors and regulators, giving them important knowledge about market behavior and assisting them in making better investment choices.