Investors pricing behaviour in emerging market: A case study in İstanbul Stock Exchange

Since 1990 researchers studied the impact of herding behavior in developed and emerging countries financial markets. Herd behavior were assumed to destabilize financial markets and that is why many studies were conducted to investigate the existence of herding behavior during market stress periods. The main objective of this study is to investigate herding behavior when Istanbul stock exchange rises and falls. The study uses daily, weekly as well as monthly stock and sectoral data from the beginning of 2000 to the end of 2018. All the data is collected from Finnet analiz excel. CSSD and CSAD models are used to test the existence of herding behavior in Istanbul stock exchange. The empirical finding shows that herding is more prevalent when the market return falls than when it rises. This shows that herding behavior is not symmetrical in the up and down market. In addition, herding is more common in the daily data than weekly and monthly data. Furthermore, this study investigates the existence of herding behavior in Istanbul Stock Exchange using a narrow index for the period between January 1, 2000 and December 31, 2018. Besides, the study tests herding behavior of investors during high and low volatility periods. The finding of the study shows that herding is more prevalent when the market return falls and from the three data type, it is more prevalent in the daily data. This indicates that investors behave rationally when the market rises and they become irrational and herd the market consensus when the market falls. On the other hand, the level of herding is significantly high during high market volatility periods. Therefore, I conclude that there is an asymmetrical investor behavior while pricing assets in Istanbul Stock Exchange. The traditional Financial Economics theories argue that information plays a significant role for price formation in the market. And empirical studies in the field of Psychology and Neuroscience proved that information can be divided in to bad, good and neutral information and bad information has a strong as well as a dominant effect than positive and neutral information. Whereas, empirical studies in the field of Behavioral Finance shows that investors psychology has a significant impact in the process of price formation. In line with these findings, this study also examined herding behavior of investors in Istanbul stock exchange using intraday data. The empirical finding indicates that herding is more prevalent when the market return falls and it is also dominant in the first half (first session) of a trading day or in the morning than afternoon. This empirical finding shows that whether the cause of negative market return is, information or non information sources, investors herd the market consensus when the market return falls. And this finding shows that there is an asymmetrical investors behavior in Istanbul stock exchange. To explain the implication of the findings I use the negativity effect theory in that negative information or event has a stronger effect than positive information or event. The other objective of this study is to investigate the asymmetric correlations in Istanbul stock exchange using market and sector indexes. Correlation coefficients significantly increases during more volatile periods than low volatile periods. At the same time, correlational relationship significantly increases when the market return falls below zero. Thus, I can conclude that portfolio diversification may not be able to protect investors from downside risks during these two market conditions. Keywords: asymmetric correlation, asymmetrical herding, diversification puzzle, downside risk, negativity bias, negativity effect, negative information, negative event