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Herding where retail investors dominate trading: The case of Saudi Arabia

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  • Rahman, M. Arifur
  • Chowdhury, Shah Saeed Hassan
  • Shibley Sadique, M.

Abstract

We investigate herding in the Saudi stock market, where more than 95% of the total trading is initiated by the individual investors. Based on readily available stock data, we find evidence of pervasive herding among the market participants. Although herding is prevalent irrespective of market conditions, it tends to get stronger in periods when the market rises and the trading activity intensifies. Traders are found to be indifferent to important stock categories in their herd behavior. Further analysis suggests that the correlated behavior of Saudi traders is unlikely to be induced by the common movements in fundamentals. Considering the unique composition of the market clientele, we interpret these findings as constituting market level evidence supporting a commonly held belief in the literature that the individual investors are more likely to be noise traders.

Suggested Citation

  • Rahman, M. Arifur & Chowdhury, Shah Saeed Hassan & Shibley Sadique, M., 2015. "Herding where retail investors dominate trading: The case of Saudi Arabia," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 46-60.
    • Handle: RePEc:eee:quaeco:v:57:y:2015:i:c:p:46-60
    DOI: 10.1016/j.qref.2015.01.002
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    5. Dina Gabbori & Basel Awartani & Aktham Maghyereh & Nader Virk, 2021. "OPEC meetings, oil market volatility and herding behaviour in the Saudi Arabia stock market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 870-888, January.
    6. Pagano, Michael S. & Sedunov, John & Velthuis, Raisa, 2021. "How did retail investors respond to the COVID-19 pandemic? The effect of Robinhood brokerage customers on market quality," Finance Research Letters, Elsevier, vol. 43(C).
    7. Puput Tri Komalasari & Marwan Asri & Bernardinus M. Purwanto & Bowo Setiyono, 2022. "Herding behaviour in the capital market: What do we know and what is next?," Management Review Quarterly, Springer, vol. 72(3), pages 745-787, September.
    8. Haitham Nobanee & Nejla Ould Daoud Ellili & Jaya Abraham, 2017. "Equity Concentration, Agency Costs and Performance of Non-financial Firms Listed on the Saudi Stock Exchange (Tadawul)," Global Business Review, International Management Institute, vol. 18(2), pages 379-387, April.
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    More about this item

    Keywords

    Market-wide herding; Retail investors; Dispersion of return; Dispersion of beta; Saudi stock market;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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