Sentimental herding in Borsa Istanbul: informed versus uninformed

Abstract

This study searches for sentimental herding in Borsa Istanbul (BIST) using a state-space model for two distinct groups of investors/traders. We expect to find no sentimental herding in BIST30 as the investors are closely following the market, given their access to maximum amount of information and high quality of guidance from the world-known intermediaries that reduce information asymmetries. However, as the SNM investors are mostly local investors with smaller assets and with higher level of information asymmetry, we expect to find evidence of sentimental herding. As expected, we find no evidence of herding by the BIST30 investors from 2000 to 2013. In contrast, our findings provide evidence that the SNM investors demonstrate sentimental herding persistently and independently from market fundamentals in three stages: evidence of herding in the first stage (2000–2004), a 4-year (2005–2008) no-herding calm period and finally a volatile adverse herding pattern (2009–2013) where fundamentals about the firm values became more important.

Keywords:

• herding
• state-space model
• cross-sectional volatility
• emerging market

JEL Classification:

• C12
• C31
• G12
• G14

Notes

¹ Borsa Istanbul (BIST) is the new name for the İstanbul Stock Exchange (ISE), which was founded in 1986.

² Of the 510 billion TL of the BIST capitalized value, the BIST30 alone accounted for 64%, in January 2014.

³ For details on these two groups, see www.borsaistanbul.com

⁴ Wermer (1999), differentiating by size, states that herding in small, growth stocks is more likely.

⁵ Matriks Information Distribution Services is a company that specializes in providing real-time financial data.

⁶ www.kap.gov.tr

⁷ www.tuyid.org/tr/

⁸ Higher order autoregressive processes were not found to be statistically significant.