The effects of extreme market conditions on investors’ herding behavior in the Malaysian stock market

The presence of herding behaviour could cause abnormality and extremely volatile markets, especially in emerging markets. This behaviour has been studied extensively but with inconclusive results. This paper investigates the effects of extreme market conditions on investors’ herding behaviour in the Malaysian stock market. Two common measures for herding behaviour were employed: cross-sectional standard deviation (CSSD) and cross-sectional absolute deviation (CSAD). Data were extracted from the daily closing prices of 346 companies listed on Bursa Malaysia. The study spans from year 2000 to 2019, consisting of pre-crisis, during-crisis and post-crisis, during up- and down-market conditions. The results from CSSD revealed the presence of herding behaviour during the pre-crisis in both extreme up and down-market conditions. In the post-crisis, herding behaviour was observed in extreme up-market conditions. Using CSAD, herding behaviour was prevalent in extreme up-market conditions and post-crisis in extreme down-market conditions. These findings offer additional evidence supporting the existence of herding behaviour during extreme market conditions. Mitigating herding behaviour through enhanced information disclosure and increased investor awareness can improve market quality and reduce volatility.