Trang 5 CHAPTER I:INTRODUCTION 1.Research problem From the perspective of Economic development or Financial development, the objective of the stock market is to promote efficient capital
FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS DEPARTMENT OF RESEARCH METHODS AND ECONOMIC FORECAST ********** FINAL EXAMINATION REPORT Research Proposal: ASSESSING THE IMPACT OF HERDING EFFECT ON THE VIETNAMESE STOCK MARKET Subject: Research Methodology for Economics and Business Class: KTEE206(GD1-HK2-2223).5 Group number: Lecturer: Dr Nguyễn Thị Bình No Name Student ID Mai Tuấn Minh 2212550046 Trần Đức Trung 2213550074 Trần Minh Đức 2211550602 Nguyễn Hải Nam 2212550048 Nguyễn Trường Giang 2212550024 Tạ Quốc Huy 2212550029 Hà Nội – 06/2023 Group GROUP MEMBER The following members are responsible for the respective sections Mai Tuấn Minh (Leader) – 35% - Research problem - Research gaps - Research questions - Research subjects and area of research - Research methods - Research structure - Literature review - Methodology Tạ Quốc Huy - 10% - Finding of secondary data - Limitation Nguyễn Trường Giang – 20% - Literature review - References Trần Minh Đức – 15% - Abstract - Conclusion - Contribution to the topic Trần Đức Trung – 10% - Research framework - Implementation plan Nguyễn Hải Nam – 10% - Research structure - Hypotheses Research proposal Group TABLE OF CONTENTS ABSTRACT CHAPTER I: INTRODUCTION Research problem Research objectives .5 Research questions Research subjects and area of research Research framework 5.1 Theoretical basis 5.2 Hypotheses .7 Research methods Research structure CHAPTER II: Literature review 10 Explanation of secondary data search .10 Research gap 13 CHAPTER III: Methodology 14 From the perspective of Behavioral finance theory .14 Basis model 15 Data analysis and research design 16 CHAPTER IV: Implementation plan 17 Timeline 17 Expected budget 17 Risk analysis .17 Contribution to the topic 17 4.1 Theoretical contribution 17 4.2 Practical contribution 17 CHAPTER V: Conclusion 18 LIMITATIONS 19 REFERENCE 20 Research proposal Group ABSTRACT Herd instinct refers to the tendency of individuals to follow the actions and decisions of a larger group, often without critically evaluating the information or rationale behind those actions, and this is one of the most important factors affecting market behavior, especially during market fluctuations or depression According to this topic, the author applied a method used by Hwang and Salmon (2004) to estimate and authenticate the herding effect in Viet Nam’s stock market The study revealed the presence of the herding effect and offered estimations of its level over time By using those estimated values about the level of herding effect in combination with qualitative analyses, the author pointed out that stockholders have to focus on trading policy in a wide range and applying short-selling trading with the preparation of transparent information from the macro environment is a prerequisite The author also reached the conclusion that herd behavior in the market is formed due to preconceived notions, biases, and undervaluation of risks right from the start Additionally, the author does not dismiss the possibility that the Vietnamese economy has an incorrect investment structure prior to the emergence of the stock market To examine the characteristics of investors' valuation behaviors, the author categorized stocks into three groups: The results from Group demonstrated that shares with Beta coefficient of below tend to be valued higher or lower than the reasonable level when the market enters the “bull” or “bear” periods respectively The results from Group showed that the shares with Beta coefficient of tend to be priced converging into the proper value The results from Group indicated that the stocks with Beta coefficient of above during the “bear” periods make investors become more cautious about setting stock prices around the reasonable level During “bull” periods, however, the prices of those stocks are valued higher than the reasonable level, but the growth rate of the economic bubble is slower than the stocks with Beta coefficient of below in the growing market KEYWORD: herding effect, the intensity of herding effect Research proposal Group CHAPTER I: INTRODUCTION Research problem From the perspective of Economic development or Financial development, the objective of the stock market is to promote efficient capital mobilization and utilization to achieve high economic growth rates for the economy A sustainable economic development requires a well-functioning financial market, including a strong and efficient stock market According to Thomas E Copeland and J Fred Weston (1992) [13], an efficient financial market is a market where all available information is fully, continuously, and accurately reflected in prices That means the prices of assets established through market transactions serve as important, accurate signals and play a guiding role in efficient capital allocation In an efficient financial market, investors can rely on these prices to make informed decisions about allocating their capital to the most productive and profitable investments The prices reflect the available information and help guide the flow of funds towards the most promising opportunities According to the points mentioned above, it can be argued that in an efficient financial market, the accurate information regarding the relative risks among firms, between industries, and their relationship to the entire economy at each point in time is fully and immediately reflected in the prices of traded financial assets This information plays a crucial role in guiding investors towards making well-informed investment decisions By accurately reflecting the relative risks among firms and industries, and their connection to the overall economy, the financial market provides a transparent and efficient platform for investors to allocate their resources effectively This, in turn, contributes to the formation of a rational investment structure within the economy, leading to optimal GDP growth outcomes Understanding and analyzing the impact of these information dynamics on investment decision-making and economic performance can provide valuable insights for policymakers, market participants, and stakeholders in the pursuit of sustainable economic development The Vietnamese stock market has entered its 25th year with ups and downs, similar to many other emerging stock markets worldwide The growth cycle of the "bull market" in global stock markets from 2020 to 2022 fundamentally shares common traits, stemming from loose monetary policies or artificially low interest rates due to the impact of the Covid-19 pandemic For example, during the price surge cycle of 2006-2008, the total number of new accounts opened exceeded 500,000, whereas at the end of 2005, the total number of accounts in the entire market was only 106,393 The period from 2020 to 2022 witnessed an even more staggering scale of new account openings: Over 3.64 million accounts were opened in the past three years, while at the end of 2019, the total number of new accounts was 2.37 million In other words, in just three years, the Research proposal Group recent market boom saw a larger number of new accounts participating than the cumulative total of the previous 20 years combined So what factors have led to the record-high influx of new investors into the stock market precisely during periods of growth and peak? Have government policies to some extent influenced these fluctuation trends? To answer these questions, a deeper analysis is needed to fully understand herd behavior or the bandwagon effect One of the common issues in emerging markets is the occurrence of herding behavior with irrational valuation mechanisms, leading to the consequence of an overheated or collapsing market, which in turn affects related markets Behavioral finance theory suggests that the inability to process large amounts of information or the lack of complete information can lead to irrational valuation at any given time When market information is incomplete, it can result in many investors making systematically irrational pricing decisions as they tend to follow the crowd As a result, market prices deviate from their fundamental values due to imbalances in supply and demand Prolonged mispricing can cause stock prices to increasingly diverge from their intrinsic value These systematically biased pricing behaviors are often referred to as "herding behavior" or "crowd behavior." This article will delve into the research on the existence of the bandwagon effect and the factors influencing crowd psychology The research problem is to determine the actual existence and extent of the bandwagon effect in the Vietnamese stock market during the period of 2020-2022 Furthermore, it is necessary to assess the valuation behavior of stock investors and identify the causes of herd behavior, as well as its impact on the market and the economy This will enable the proposal of appropriate policies by the government in market regulation and support measures Additionally, the article will provide analyses to help businesses and investors respond appropriately when the herding effect is dominant Research objectives The topic will aim to measure the herding effect in the Vietnamese stock market based on the model of Hwang and Salmon (2004) and develop the models of Chang, Cheng, and Khorana (2000), and Christie, Chang, and Hwang (1995) The measured parameters will be used to identify valuation behavior and analyze the factors influencing the herding effect Based on these analyses, policy proposals and recommendations will be presented to the government The proposed policies will be based on a neutral standpoint, aiming to promote self-regulation of relevant parties and achieve effective market management Research questions In this research, the following question are posed: Research proposal Document continues below Discover more from:doanh quốc tế Kinh KDO307 Trường Đại học Ngoại… 839 documents Go to course ÔN TẬP KINH Doanh 27 QUỐC TẾ 081548 Kinh doanh quốc tế 100% (8) QUAN HỆ KINH TẾ QUỐC 43 TẾ - QHKTQT Kinh doanh quốc tế 100% (7) Finalllll VĂN HOÁ - Văn 39 hoá Kinh doanh… Kinh doanh quốc tế 100% (7) Tiểu-luận-KTQT- đề tài 19 AFTA Kinh doanh quốc tế 100% (4) Van-hoa-kinh-doanh cau-hoi-trac-nghiem-… Kinh doanh quốc tế 100% (4) CHIẾN LƯỢC KINH Doanh i ii iii iv v 29 QUỐC TẾ CỦA TẬP ĐOÀ… Group Does the herding effect exist in the Vietnamese stockKinh market? If so, to what doanh 100% (3) extent does the herding effect occur? How to measure the herding quốc tế behavior in the Vietnamese stock market? What factors influence the herding effect in the Vietnamese stock market? Can we identify the causes of herd behavior and its impact on the market and the economy? What policies and recommendations can be proposed based on the research findings to effectively manage the Vietnamese stock market and support businesses and investors in dealing with the herding effect? How can businesses and investors respond appropriately when the herding effect is strong? Are there specific analyses that can help them make informed decisions and take appropriate actions in such situations? In the current context, what are the limitations in managing and regulating the herding effect in the Vietnamese stock market? Is it necessary to introduce new measures or adjust existing policies to ensure the stability and sustainable development of the stock market? Research subjects and area of research The research variable or research object is the intensity of herding effect This variable is constructed based on the source variable, which is the Beta risk coefficient of companies according to the CAPM model The scope of the study is the extent of herding effect in the Vietnamese stock market, with peripheral analyses including companies and investors operating in the Vietnamese stock market The data used is the prices of stocks traded on the Ho Chi Minh City Stock Exchange (HOSE) from October 1, 2020, to June 19, 2022 Research framework 5.1 Theoretical basis Stock market: A stock market, also known as a stock exchange, is a venue to trade securities, such as bonds and shares Sellers of securities are matched with their buyers in a stock market and they trade with each other using rules imposed by the market's governing authority Stock markets began as physical locations where traders gathered to buy and sell shares but most trades are now conducted online Stock markets serve an important function in the economy by enabling entrepreneurs to raise capital and companies to expand their operations using funding from the markets On the other side, stock markets generate profits for buyers of securities by making informed bets on growth prospects for these companies These tasks are accomplished with the help of extensive regulation that govern trades and enforce mandatory disclosure of details from both sides Depending on trading volume and economic conditions, stock markets can be bellwethers of the broader economy Research proposal Group Herding effect (Bandwagon effect): Refers to the situation when investors imitate or follow the investment decisions of others instead of making independent decisions It leads to collective behavior and can distort market prices It can be driven by information cascades, social influence, and psychological biases Herd instinct in Financial market: Refers to the tendency of investors to follow the crowd and imitate the investment decisions of others, rather than making independent judgments based on fundamental analysis or individual research It is a psychological phenomenon where investors believe that there is safety in numbers and that following the crowd will lead to better outcomes However, herding behavior can amplify market volatility and lead to irrational investment decisions It is influenced by factors such as social influence, information cascades, and the fear of missing out (FOMO) The intensity of herding effect: The psychology of the crowd influences valuation behavior and creates prolonged mispricing, resulting in herding effect The level of herding effect includes two attributes: the magnitude of price deviation impact and the duration (or lag) of the impact state The article will use the terms herding effect and level of herding effect interchangeably Valuation behavior: Refers to the process of determining the intrinsic value or worth of a company's stock It involves analyzing various factors such as financial statements, market trends, industry performance, and future prospects to assess the fair value of a stock 5.2 Hypotheses There are several hypotheses regarding the Bandwagon Effect and its impact on the Vietnamese stock market: Information Cascade Theory: An Information cascade or informational cascade is a phenomenon described in behavioral economics and network theory in which a number of people make the same decision in a sequential fashion This theory proposes that investors are more likely to follow the lead of others when they are uncertain about the market's direction or when they lack sufficient information to make informed decisions Information cascade can feed speculation and create cumulative and excessive price moves, either for the whole market (market bubble) or a specific asset, like a stock that becomes overly popular among investors Since the private information of cascade followers is not revealed, information cascades can be suboptimal Moreover, because the small amount of information revealed early in a sequence has a large impact on social welfare, cascades can be fragile, with abrupt shifts or reversals in direction when new information becomes available (Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades Bikhchandani, Hirshleifer, and Welch (1992, 1998; hereafter BHW), Gale (1996), Goeree et al (2004)) Indeed, some argue that the volatility induced by herding behavior can increase the fragility of financial Research proposal Group markets and destabilize the broader market system (Eichengreen et al (1998), Bikhchandani and Sharma (2000), Chari and Kehoe (2004)) Social Influence Theory: Social Influence Theory suggests that social factors, such as peer pressure and social norms, play a significant role in driving the Herding Effect It comprises the ways in which individuals adjust their behavior to meet the demands of a social environment - people have a tendency to change their behavior according to those around them, and those nearby have stronger effects than those further away This can manifest as individuals following the investment recommendations of their friends, family members, or colleagues, even if they not fully understand the reasoning behind those recommendations Individuals may be more likely to follow the investment recommendations of others in their social network who have a similar background or investment strategy According to behavioral finance theory (Bauman, 1967; Burrell, 1951; Slovic, 1972), the trends of finance indicators not fully satisfy a random walk, yet they can be predicted to some extent by analyzing investors’ irrational behaviors; for example, the Sheep-Flock Effect (Scharfstein & Stein, 1990), especially in relation to investor sentiment, which is considered a systematic factor Behavioral Finance Theory: Behavioral finance is the study of the influence of psychology on the behavior of investors or financial analysts (Glaser, Markus and Weber, Martin and Noeth, Markus (2004)) It assumes that investors are not always rational, have limits to their self-control and are influenced by their cognitive biases, such as fear of missing out or overconfidence Investors may make cognitive errors that can lead to wrong decisions by following the herd because they believe that everyone else knows something they not know, or because they are overly optimistic about the prospects of a particular stock or market Research methods Using stock prices traded on the Vietnamese stock market during the period of 2020-2023, the herding effect will be measured based on the model proposed by Hwang and Salmon (2004) to derive measurement parameters The model developed by Chang, Cheng, and Khorana (2000) will be extended, referring to the model by Christie, Chang, and Huang (1995) to validate the findings Employing econometric tools and utilizing the Kalman filter to process data and estimate the models Constructing a quantitative financial econometric model to identify valuation behavior Combining qualitative analysis and the Utilization of the foundations of Behavioral Economics and Behavioral Finance Research structure The research is divided into chapters as follows: Research proposal Group Chapter 1: Introduction Research problems Research objectives Research questions Research subjects and area of research Research framework Research methods Chapter 2: Literature Review Explanations of secondary data search Research gap Research structure Chapter 3: Methodology Explanation of secondary data search From the perspective of Behavioral Finance Theory Chapter 4: Implementation plan Timeline Human resources Expected budget Risk assessment Contribution to the topic Chapter 5: Conclusion Discussion of research aims and objectives Limitation of research References Research proposal Group CHAPTER II: LITERATURE REVIEW Explanation of secondary data search There have been many studies on assessing the bandwagon effect, which incorporated mathematical models and theories of behavioral finance within their research methods Despite being empirical, the studies supported new theories in behavioral finance These research were based on the hypothesis that stock markets are inefficient and mathematical models in finance are no longer normative as initially developed Some research have recently gained popularity, with the most notable being the model constructed by Soosung Hwang and Mark Salmon (2004) [12] To begin with, it is important to mention the studies and thesis doubting the existence of efficient stock markets in reality According to Shiller Robert J (2003) [11] as well as Bikhchandani and Sharma (2001) [5], the research conducted by Summers (1986), Shiller (1981, 1988) showed that stock valuation models and the efficientmarket hypothesis contained aspects that failed to translate into reality Shiller (2003) [11] believes the reason is that while investors unanimously agreed on rational expectations, they also reflected all the information in the market into share prices in an unrealistic manner Therefore, the act of simulating, analyzing behaviors on stock pricing in real stock markets using models built for efficient markets would lead to unconvincing conclusions The efficient-market theory claims that all investors want to maximize profit This theory describes an efficient market where investors would use publicly available information in the stock market, knowing that other investors would so In that sense, all investors would certainly make similar decisions, thus creating a large contingent of people following the same trend However, researchers on behavioral finance were skeptical of this explanation and argue that the fact that investors follow the same pattern was as a result of herd behavior in inefficient markets Bikhchandani and Sharma (2001) defined herd behavior as the type of behavior that influences investors’ decisions and as a consequence, they follow similar trends in stock valuation in the market What really made investors dismiss their own analysis of the market to copy others? Bikhchadani and Sharma (2001) [5] have synthesized the studies from previous researchers and concluded that there are main reasons behind the existence of types of herd behavior Firstly, Bikhchandani and Sharma (2001), based on Avery and Zemsky’s findings (1998), believe that people always acknowledge that there will be a few investors in the stock market who possess information about the actual yield of investments in firms, and that their investments would implicitly reveal such secrets to the public Hence, individual investors would follow the bandwagon whenever there is information disclosed This is due to the fact that participants not have perfect information about Research proposal 10 Group the market, while their analytical capability in order to make informed decisions is limited In such cases, some groups of investors would intentionally create bandwagons through information asymmetry to gain benefit Meanwhile, some others acknowledge that these types of information might not be valid but would still follow in hope of benefiting in the short term Secondly, Bikhchandani and Sharma (2001) [5] share the same views with Devenow and Welch (1996) [8], as they proved that investors believe that following popular trends in the market is the optimal option This is often the case for inexperienced fund managers and analysts, as they want to build their reputation safely by joining bandwagons even if their personal analysis opposes them Thirdly, Bikhchandani and Sharma (2001) [5] along with Scharfstein and Stein (1990) [10], as well as Maug and Naik (1996) [9] discovered that portfolio managers would follow popular trends in the market to maximize their bonuses, since this type of reward corresponds with the profit margin of their investments Bikhchandani and Sharma (2001) [5] reviewed the studies of DeLong, Shleifer, Summers and Waldman (1990) Froot, Scharfstein and Stein (1992), Lux and Marchesi (1999)… using the Bayesian approach (applying posterior probability) These authors reached a consensus that investing along with the crowd is irrational as this would result in distorted price levels The aforementioned studies indicate that an efficient market is unlikely to exist in reality Therefore there are main reasons for herd behavior in investing The studies also proved that the consequence of sharing the same investing pattern would create skewed price levels in the market The next issue is to develop methods to measure and verify the extent to how herd behavior affects the act of valuing stocks, thus creating price distortions Chang, Cheng and Khorana (2000) [6] and Christie and Huang (1995) [7] have developed a method to discover the phenomenons of the bandwagon effect in investing by studying the fluctuation of deviations in stocks’ yield compared to the average yield and the market index yield Christie and Huang’s model (1995) [7] created cross deviation variables of stock yield in the market Afterwards, the model created dummy variables receiving value number when they fall into the positive maximums of the probability distribution of market yield and verified whether investing behaviors during peak time periods differ from other time periods Soosung Hwang and Mark Salmon (2004) [12] counter-argued by demonstrating that during the periods when the Dow Jones index and the NASDAQ index showed great volatility, herd behavior in the stock market failed to be expressed through stock prices The study also witnessed that considerable fluctuations in yield deviation coincided with the restructuring of different sectors Therefore, Hwang and Salmon (2004) [12] remain skeptical of the statement that the herding effect only occurs during periods when yield varies greatly, since setting the maximums of market yield is Research proposal 11 Group often subjective Additionally, the two researchers believe that this model did not consider filtering information about the changes in assets’ intrinsic value, hence it is not possible to conclude whether the herding effect actually occurred or the assets adjusted their intrinsic values themselves On that account, the probability of identifying whether stock markets are efficient or inefficient is extremely unlikely, if not zero Hwang and Salmon (2004) [12] developed a model to assess the herding effect in stock markets, which, until this day, is widely used by many authors for quantitative purposes in different markets The number of studies on behavioral finance in Vietnam is still limited In recent years, some studies have shown that Vietnam is an inefficient market In 2008, Le An Khang completed his master’s degree with the topic “The Effects Of Information Asymmetry On Investors In Ho Chi Minh City’s Stock Market”, with the instruction of PhD Nguyen Trong Hoai from Ho Chi Minh City University of Economics In 2009, Le Thi Ngoc Lan presented her master’s thesis with the topic “Studying The Theory Of Behavior In Viet Nam’s Financial Market”, supported by PhD Phan Thi Bich Nguyet from Ho Chi Minh City University of Economics Vo and Phan (2016) used a sample of firms on HOSE between 2005 and 2015 to investigate the herding behavior in the Vietnamese stock market The author uses standard least square estimates to explore the bandwagon effect in both rising and declining markets Quantile regression was used in further studies to support the finding of herding during the time period Luu and Luong (2016) utilized CSAD in the return dispersion model and State Space Model to explore the presence of herding behavior in the stock markets of Vietnam and Taiwan, specifically during the periods of the H1N1 and COVID-19 pandemics Their study focused on examining the variations in herding behavior between frontier and developing countries by analyzing multiple enterprises in the Vietnam and Taiwan stock markets Bui et al (2018) conducted a study to investigate investor behavior in the Vietnamese stock market and to test the presence of herd mentality across 16 industry sectors and two market portfolios, namely HOSE and HNX To address concerns related to multicollinearity and autocorrelation in regression models, the researchers used modified models The findings of the study revealed the occurrence of herding behavior in all sectors of the Vietnamese stock market Additionally, the research indicated that Vietnamese investors closely monitor market activities in the United States and Hong Kong, and it is likely that their investment decisions are influenced by the performance of the American market These topics have suggested novel ideas in studying the behavior of stock valuation with the crowd of participants in Vietnam’s stock market Research proposal 12 Group Research gap Although many studies have examined the herding effect in the stock market, there is a lack of comprehensive empirical evidence on the specific impact of the bandwagon effect on the Vietnamese stock market While the concept of the bandwagon effect is well-known in behavioral finance, existing research primarily focuses on developed markets, leaving a gap in terms of tailored analysis for the Vietnamese market By conducting empirical studies, we can gain insights into how the bandwagon effect manifests in Vietnam and its implications for market dynamics Research proposal 13 Group CHAPTER III: METHODOLOGY From the perspective of Behavioral finance theory According to Thomas E Copeland and J Fred Weston (1992) [13], there exists a self-monitoring mechanism in an efficient market through the disclosure of information, which leads to a stable equilibrium state The transparency of information also contributes to the self-monitoring and self-balancing mechanism, reducing the potential for investors to obtain superior returns compared to the market The literature review studies have shown the weaknesses of the efficient market hypothesis in practice The efficient market hypothesis assumes that the information about the price movements of a particular stock is symmetrical, complete, and not overwhelming for investors' analytical abilities However, when considering the overall stock market, the situation is different due to the interaction of stocks that are inherently interdependent Therefore, if there is a certain factor that triggers a herd mentality in the market, it can persist and be difficult to reverse due to the influence of cognitive biases To support research and the application of models built under standard and ideal conditions into practice, studies in the field of Behavioral Economics and Behavioral Finance have been increasingly developed In this article, the author will use the arguments and principles of behavioral finance theory to provide an analysis of the behavior of investors in the Vietnamese stock market and the mechanisms that shape and influence these behaviors According to Dan Ariely (2009) [1], a researcher in behavioral economics, the study of behavioral psychology involves three steps: First, identifying behavior through experimental observation Second, identifying contrasting points with rational and logical perspectives The explanation is based on comparing with the expected behavior that should occur rationally From there, it highlights the biases that lead to disadvantages at certain points It only considers disadvantages that waste resources by reducing the efficiency of an output process Third, proposing ways to adjust behavior towards rationality if the biases are found to be detrimental According to the theory of behavioral finance, the viewpoints and research methods proposed above can be applied in the financial market if one of the following three conditions is identified: First, there are premises for the emergence of irrational valuation behavior Second, the environment harbors systematic driving forces for irrational valuation behavior Third, there are obstacles to the process of reversing irrational valuation behavior Research proposal 14 Group It can be observed that affirming the existence of the bandwagon effect in the stock market implies that at least one of the three conditions mentioned above has occurred in the stock market, indicating market inefficiency Therefore, the theory of behavioral finance can be applied to analyze behavior and provide policy suggestions for regulating behavior in the stock market and the financial market, with the aim of guiding the market towards self-regulation, self-monitoring, and self-balancing effectiveness In this case, it is necessary to examine the existing institutional framework, laws, and public policies to understand which mechanisms have facilitated the formation of one of the three mentioned conditions Based on that, identify the causes that have contributed to and the risks that may exacerbate one of the three conditions mentioned Basis model Hwang and Salmon (2004) conducted a research study on herding behavior in financial markets They proposed a model to measure the herding effect using the concept of cross-sectional dispersion of stock returns The equation they used is as follows: CSADt = ∑ (Ri,t – Rm,t) / N Where: ● CSADt represents the Cross-Sectional Absolute Deviation at time t ● Rit denotes the individual stock return at time t ● Rmt signifies the market return at time t ● N represents the number of stocks in the sample The CSAD is calculated by taking the absolute deviation of each individual stock return from the market return and summing them up, divided by the number of stocks This measure captures the dispersion of individual stock returns around the market return The authors used the CSAD measure to estimate the herding effect in financial markets They hypothesized that if herding behavior exists, there will be a higher level of cross-sectional dispersion, indicating a lack of independent decision-making by investors The Capital Asset Pricing Model (CAPM) describes the relationship between an asset's expected return and its systematic risk in an efficient market In an efficient market, securities are assumed to be priced correctly based on their risk and return characteristics The CAPM equation is as follows: E(Ri) = Rf + βi * (E(Rm) - Rf) Where: ● E(Ri) represents the expected return of asset i Research proposal 15 Group ● Rf is the risk-free rate of return, which represents the return on a risk-free investment (such as a government bond) ● βi is the beta coefficient of asset i, which measures the systematic risk or sensitivity of the asset's returns to the overall market returns ● E(Rm) is the expected return of the market portfolio The CAPM equation states that the expected return of an asset is equal to the riskfree rate plus a risk premium The risk premium is determined by the beta coefficient, which measures how much the asset's returns are expected to move in response to changes in the overall market returns The risk premium is calculated as the market risk premium (E(Rm) - Rf) multiplied by the asset's beta In an efficient market, the CAPM suggests that the expected return of an asset is solely determined by its systematic risk The model assumes that investors are rational and risk-averse, and they will only demand higher expected returns for bearing higher systematic risk Data analysis and research design The research will utilize data on closing prices and reference prices from trading sessions of listed stocks on the Ho Chi Minh Stock Exchange (HOSE) The data source will be provided by Tan Viet Securities Company (TVSI) and the General Statistics Office The author collected transaction data from October 1, 2020, to June 19, 2022, covering 402 stock codes The procedure to estimate the model proposed by Hwang and Salmon (2004) is as follows: i ii iii iv Calculate the returns of individual stocks and the Vn-Index on a daily basis, and measure the volatility of market returns represented by the standard deviation of Vn-Index returns Also, calculate the average returns of Vn-Index on a monthly basis Estimate the beta coefficients for each month and each stock using the SIM model, which is a quantitative economic model based on the Capital Asset Pricing Model (CAPM) Calculate the cross-sectional standard deviation (CSSD) of the beta coefficients for stocks within each month Apply the Kalman filter estimation using Python to the obtained CSSD series in order to extract the parameters of the herd effect and test the statistical significance of these parameters Research proposal 16 Group CHAPTER IV: IMPLEMENTATION PLAN Timeline Starting time: 07/06/2023 - Finishing time: 19/06/2023 Expected budget This research received no special financial resources Risk analysis External risk: The accuracy and reliability of the used database may not be absolute Internal risk: i ii Misunderstanding information from the database During the progress of finding and filtering data, members may accidentally omit information or transfer them incorrectly into this report Contribution to the topic 4.1 Theoretical contribution Understanding the bandwagon effect: The study helps to understand the bandwagon effect and how it affects the Vietnamese stock market This knowledge can be applied to other stock markets across the world to predict the behavior of investors during certain market conditions Identification of influential factors: The study identifies the influential factors that contribute to the bandwagon effect in the Vietnamese stock market This knowledge can be used by market analysts and policymakers to implement measures that can help to mitigate the effect of the bandwagon effect on the market 4.2 Practical contribution Improving investment decisions: The findings of the study can help investors to make better investment decisions by providing insights into the factors that drive the bandwagon effect This can help investors to be more informed and to avoid making investment decisions based on herd mentality Advancing academic research: The study contributes to the existing body of knowledge on the behavior of investors in the stock market It provides empirical evidence of the impact of the bandwagon effect on the Vietnamese stock market and contributes to academic research in finance and economics Research proposal 17 Group CHAPTER V: CONCLUSION Herd instinct refers to the tendency of individuals to follow the actions and decisions of a larger group, often without critically evaluating the information or rationale behind those actions, especially during periods of market tension such as expansion or recession In the context of this study, the author applied a method employed by Hwang and Salmon (2004) to estimate and validate the herding effect in Vietnam's stock market This method takes into account various time series factors that contribute to the phenomenon Through qualitative analyses, the author emphasized the need for investors to focus on trading policies across a wide range and highlighted the importance of implementing short-selling trading with transparent information from the macro environment as a prerequisite Based on the estimated models presented above, it is evident that short-term macro factors not play a significant role in driving the herding instinct in Vietnam's stock market This is reflected in the insignificance of the coefficients of variables such as market yield and the 3-month bill yield of the government in the model Furthermore, it is suggested that the bandwagon effect is formed through preconceived notions and biases The author also acknowledges the possibility that Vietnam's economy may have had a flawed investment structure prior to the emergence of the stock market The author also achieved a significant analysis about market behavior in different share groups: The results from Group demonstrated that shares with Beta coefficient of below tend to be valued higher or lower than the reasonable level when the market enters the “bull” or “bear” periods respectively The results from Group showed that the shares with Beta coefficient of tend to be priced converging into the proper value The results from Group indicated that the stocks with Beta coefficient of above during the “bear” periods make investors become more cautious about setting stock prices around the reasonable level During “bull” periods, however, the prices of those stocks are valued higher than the reasonable level, but the growth rate of the economic bubble is slower than the stocks with Beta coefficient of below in the growing market Research proposal 18