Herding Behaviour and Cross-Market Correlation: Evidence from BRICS stock markets on India

Abstract

Herding behaviour refers to the tendency of investors to follow the actions of their fellow participants, while ignoring their self-analysis and wisdom. It is one such manifestation of human psychology which is assumed to significantly influence investment decisions, leading sometimes to market inefficiencies like overpricing, asset bubbles and crashes. The herding behavior escalates not only because of domestic factors, but is significantly influenced by the global economic and political events as well. This spillover effect, known as contagion impact, is more visibly seen among countries which are economically and politically interconnected, especially in case of trade blocs like BRICS. This paper attempts to study contagion impact exerted by BRICS nations (other than India) on Indian herding behaviour. It employs the pioneer technique of Cross- Sectional absolute deviation (CSAD) to compute the impact of herding and market fluctuations in other BRICS nations on Indian herding. The paper studies daily closing prices of stocks listed on the important stock exchange indices namely NIFTY- 50, SSE, BOVESPA, MOEX and FTSE/JSE for a period of 10 years (2015-2024) to assess herding. The study concludes that there is a robust direct correlation between herding in China and Brazil and that of India. Although the other two member nations of BRICS trade-bloc, namely Russia and South-Africa also exert a similar impact, but the empirical evidence obtained is not very strong. This contagion impact may be clearly visible during times of turbulence, be it political or economic. The findings of the study will have important implications for regulators of stock markets and will assist them in promoting a more stable environment.