Does herd behavior exist among Investors of Shariah-compliant equities in Malaysia?

• Main Authors: Kamil, K.H., Abidin, S.N.Z.
• Published: 2017
• Online Access: http://dspace.uniten.edu.my/jspui/handle/123456789/5860

Herd behavior in stock market involves the decision action of an investor to imitate the trades of other investors, regardless of the assessment on market fundamentals. This behavior can transform investors in making investment decision irrationally, which might contradict with the Islamic approach to decision under uncertainty. This study examines the existence of herd behavior in the Malaysian stock market with specific focus to Shariahcompliant equity investors, which we believe religious factor has important bearing on portfolio choices of these investors. In methodology, herd behavior in this study is determined using cross-sectional standard deviation (CSSD) of returns, or dispersion based on monthly returns data of 139 out of 204 constituents of FTSE Bursa Malaysia EMAS Shariah Index covering the period from January 2007 to September 2015. The results show no significant evidence of herd behavior in the overall Shariah-compliant equities market as well as in any sectors level in three different sub-periods of 2007–2009, 2010-2012 and 2013–2015. These results seem consistent with the rational asset pricing theory that investors of Shariah-compliant equities are rationally behaved in their investment decision making apart from being risk-averse during market stress. From the context of Islamic perspectives, investors of Shariah-compliant equities should however remain to exercise caution throughout the process of investment decision by not merely following action of others and rely on chance and hope as it might lead to the essence of gambling. © 2017 American Scientific Publishers All rights reserved.