An Analysis of Herding in the Korean Stock Market Using Network Theory

Hwang, Soosung; Kim, Young-Il; Shin, Jinho

doi:2018.47.3.505

Korean J Financ Stud > Volume 47(3); 2018 > Article

Korean Journal of Financial Studies 2018;47(3):505-542.
DOI: https://doi.org/10.26845/KJFS.2018.06.47.3.505 Published online June 30, 2018.

An Analysis of Herding in the Korean Stock Market Using Network Theory

Soosung Hwang, Young-Il Kim, Jinho Shin

An Analysis of Herding in the Korean Stock Market Using Network Theory

Soosung Hwang, Young-Il Kim, Jinho Shin

성균관대학교

Abstract

Using network theory, we investigate if investors follow movements of closely ‘connected stocks’ regardless of their fundamentals or industries when investment decision is driven by panic under stress. We find strong evidence of herding in the Korean market for the period from January 2005 to December 2015 as in previous studies in herding. However, herding arises at positive extreme market movements during bear states. We interpret the results as follows: during bear states when the expected market return is high, overconfident investors over-respond to good signals because the signals are consistent with their priors of the high expected market return (self-attribution bias). Herding does not necessarily arise by panic under stress.

Key Words: Herding,Network,Regime Switching,Overconfidence,Connected Stocks,군집행동,네트워크,국면전환,과신,연결된 주식