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
Trang 1FOREIGN 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
Hà N i 06/2023 ộ –
Trang 2GROUP MEMBER The following members are responsible for the respective sections
1 Mai Tuấn Minh (Leader) 35%–
Trang 3TABLE OF CONTENTS
ABSTRACT 3
CHAPTER I: INTRODUCTION 4
1 Research problem 4
2 Research objectives 5
3 Research questions 5
4 Research subjects and area of research 6
5 Research framework 6
5.1 Theoretical basis 6
5.2 Hypotheses 7
6 Research methods 8
7 Research structure 8
CHAPTER II: Literature review 10
1 Explanation of secondary data search 10
2 Research gap 13
CHAPTER III: Methodology 14
1 From the perspective of Behavioral finance theory 14
2 Basis model 15
3 Data analysis and research design 16
CHAPTER IV: Implementation plan 17
1 Timeline 17
2 Expected budget 17
3 Risk analysis 17
4 Contribution to the topic 17
4.1 Theoretical contribution 17
4.2 Practical contribution 17
CHAPTER V: Conclusion 18
LIMITATIONS 19
REFERENCE 20
Trang 4ABSTRACT
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 1 demonstrated that shares with Beta coefficient of below
1 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 2 showed that the shares with Beta coefficient of 1 tend
to be priced converging into the proper value
The results from Group 3 indicated that the stocks with Beta coefficient of above
1 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
1 in the growing market
KEYWORD: herding effect, the intensity of herding effect
Trang 5According 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
Trang 6recent 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
2 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
3 Research questions
In this research, the following question are posed:
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Trang 8Group 1
i. Does the herding effect exist in the Vietnamese stock market? If so, to what
extent does the herding effect occur? How to measure the herding behavior in the
Vietnamese stock market?
ii. 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?
iii. 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?
iv. 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?
v. 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?
4 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
5 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
CHIẾN LƯỢC KINH Doanh QUỐC TẾ CỦA TẬP ĐOÀ…Kinh doanh
quốc tế 100% (3)
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Trang 9Herding 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
Trang 10markets 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 do 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 do 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 do not know, or because they are overly optimistic about the prospects of a particular stock or market
6 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
7 Research structure
The research is divided into 5 chapters as follows:
Trang 11Chapter 2: Literature Review
1 Explanations of secondary data search
2 Research gap
3 Research structure
Chapter 3: Methodology
1 Explanation of secondary data search
2 From the perspective of Behavioral Finance Theory
Chapter 4: Implementation plan
Trang 12CHAPTER II: LITERATURE REVIEW
1 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 efficient-market 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 do 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 3 main reasons behind the existence of 3 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 do not have perfect information about