HERDING IN TURKEY DURING THE GLOBAL FINANCIAL CRISIS

Abstract

Purpose- The purpose of this study is to give evidence on herding behavior in Turkey during the global financial crisis of 2007-2009. In this study, we want to see if herding behavior is observed in Borsa Istanbul during the period when an unexpected event happened in the market. During crisis periods, investors usually follow the market consensus rather than their own mind and therefore it is more possible to detect herding behavior during crisis periods (Christie and Huang, 1995). Accordingly, we will try to calculate herding behavior statistics using the number of trades by institutional investors in the BIST30 index in Borsa Istanbul for each month between October 2008 and November 2009 which is the time period that the global financial crisis showed its effect in Turkey. Methodology- This study employs the methodology developed by Lakonishok, Shleifer, and Vishny (hereafter LSV) (1992) in order to measure herding behavior. The statistical measure developed by LSV (1992) tries to detect whether investors in a stock exchange are inclined to stay together on the buy side or on the sell side of a given stock in a given time period. In order to measure herding behavior in Turkey, we use the number of trades by institutional investors for each stock in each month between October 2008 and November 2009 in the BIST30 index. The data was gathered from the Central Securities Depository of Turkey. Findings- The analysis of this study reveals that the herding behavior statistic for the global financial crisis period is 1.42% in Turkey. 1.42% implies that if the possibility of a buy or sell in the market is 50%, then 51.42% of institutional investors were changing their trades in one direction and 48.58% in the other direction. The herding measure of LSV (1992) in their study was 2.7%, and the authors concluded that this is a small measure of herding behavior and that there is no significant evidence of herding among pension fund managers that they analyzed. Similarly in our study we find a small measure of herding as 1.42% and it is possible for us to say that there is a small evidence of herding practiced by institutional investors in Turkey during the global financial crisis of 2007-2009. Conclusion- Based upon the findings of the analysis, it may be concluded that during the global financial crisis, there was a small evidence of herding practiced by institutional investors in Turkey. As the literature about herding behavior indicates, in crisis periods, investors usually prefer to follow the common information in the stock market rather than their own mind. According to our findings there is a small herding behavior statistic for the global financial crisis period in Turkey. We can say that the global financial crisis did not lead to a very high level of herding behavior in Borsa Istanbul. Further studies can calculate herding behavior statistics for other crisis terms in order to be able to generalize this result that there is a small evidence of herding practiced by institutional investors in Turkey during financial crisis periods

Keywords

• herding behavior
• LSV measure
• global financial crisis

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