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Herd Behavior In Malaysian Capital Market: An Empirical Analysis

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  • Jarita DUASA
  • Salina H. KASSIM

Abstract

This study examines the existence of herd behavior among foreign investors in the Malaysian capital market. In methodology, the study analyzes the herd behavior by estimating vector error correction (VECM) model of FPI inflows as well as FPI outflows from/to major investors such as the United States, United Kingdom, Singapore and Hong Kong using quarterly data covering the period of Q1:1991 to Q3:2007. In addition, the variance decompositions and impulse response functions analyses are also adopted for further inferences. The findings provide empirical support on the existence of herd instinct among the foreign investors in the Malaysian capital market. The findings imply that the Malaysian short-term capital market can be volatile due to the herd behavior of the major portfolio investors. It is therefore imperative for Malaysia to take the necessary pre-cautionary measures to ensure that an aggregate reversal in portfolio investment flows would not result in a de-stabilising impact on the economy. This study emphasizes the need to improve market supervision and strengthen the financial structure in efforts to reduce the impact of capital reversal on the Malaysian financial market.

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Bibliographic Info

Article provided by Spiru Haret University, Faculty of Financial Management and Accounting Craiova in its journal Journal of Applied Economic Sciences.

Volume (Year): 4 (2009)
Issue (Month): 1(7)_ Spring 2009 ()
Pages:

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Handle: RePEc:ush:jaessh:v:4:y:2009:i:1(7)_spring2009:50

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Web page: http://www2.spiruharet.ro/facultati/facultate.php?id=14
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Keywords: Price Index; Exchange Rate; Cointegration; Causality;

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  1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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  3. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
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  7. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  8. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  9. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  10. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
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  12. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
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