Dynamic Conditional Correlation Analysis of Investor Herding: Evidence from the Indonesian and Malaysian Capital Markets

This paper applies the Dynamic Conditional Correlation (DCC) multivariate GARCH model by including a volatility index to examine herding behavior. We analyzed whether stock return dispersion to the market return has a time-varying conditional correlation in the Indonesian and Malaysian capital markets. We used daily returns data of blue-chip stock and LQ۴۵ & KLCI index for the period January ۲۰۱۵ – December ۲۰۲۲ to capture herding effects among the investors of both capital markets. The main findings demonstrate herding behavior in bullish markets before the pandemic, but only for the LQ۴۵ and not for the KLCI. Herding will result in lower market returns. We further establish that the volatility index exhibits significant positive changes in a bearish condition amidst the epidemic in both indexes. These findings suggest that while institutional and long-term investors dominate the market for blue-chip companies, they nonetheless make investment decisions based on the majority under specific circumstances. The partial presence of herding behavior and anxiety indices in the market provides support for the behavioral finance theory, which suggests that individuals may exhibit irrational behavior.

کلیدواژه ها:

dispersion ، DCC GARCH ، multivariate ، Volatility