Abstract
The influence of psychology on the behaviour of investors has been perennially popular since the inception of the behavioural financial theory. The theory led to the question of the rationality of investors, stating that investors are not always rational and are influenced by their own biases. ’Biases’ can be considered a cognitive error that can make individual investors imitate a group’s behaviour rather than atomistic decision-making based on their information. This led to the instigation of the herd instinct phenomenon in stock markets. Several research studies identified that herding was observed in developing stock markets due to asymmetric information and other agency problems. On the contrary, developed markets scarcely observe such patterns as they are lucid, and stocks (equities) trade at their fair market value on exchanges, otherwise termed the Efficient Market Hypothesis (EMH). However, it was identified that certain unexpected situations (events) can alter the EMH. These events can be considered as a black swan – a metaphor describing a high-impact event that comes as a surprise and is inappropriately rationalised. This paper provides insights to help understand the existence of herd mentality in the UK stock market during the 2019 pandemic. By implementing the quadratic regression, the study focuses on proving the non-linear relation between the stocks’ cross-sectional absolute deviation (CSAD) and the average market returns of the FTSE 100 Index. The models are evaluated to establish a low dispersion of stocks proportional to market returns, proving herd instincts among investors. A quantile regression is also implemented to analyse the behaviour within different quantiles. The anticipated results were observed during the pandemic in asymmetric (down) market conditions. However, the results showed no signs of herding during (up) market conditions, disproving the theory. These findings offer significant insights for future research in this field.
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-Share Alike 4.0 International License.
Recommended Citation
Ramachandran, Ranjith
(2025)
"Black Swan & Herding Behaviour: A Data Science Perspective,"
Critical Letters in Economics & Finance:
Vol. 2:
Iss.
1, Article 3.
Available at:
https://arrow.tudublin.ie/clef/vol2/iss1/3
