The COVID-19 pandemic and herding behaviour among investors in Shariah-compliant stocks

Purpose - This paper aims to investigate whether the COVID-19 pandemic leads to the formation of herding behaviour among investors in Shariah-compliant stocks. Design/methodology/approach - This study uses a sample of the stocks that constitute the Dow Jones Islamic Market Malaysia Titans 25 Index, over the period from 6 December 2017 to 12 March 2021. Findings - This paper provides robust evidence on the contribution of the COVID-19 pandemic to the formation of herding behaviour in Shariah-compliant stocks. The findings also reveal that herding behaviour occurs only during falling market. Research limitations/implications - The findings provide useful implications for policymakers and portfolio managers seeking to understand the behaviour of investors in Shariah-compliant stocks during turbulent periods. The presence of herding behaviour begs the question on the market efficiency and limits its potential to offer diversification benefits to investors. The findings suggest that policymakers and investors should mitigate misvaluations that occurred during the COVID-19 outbreak because the herding behaviour can drive stock prices away from their equilibrium values. Thus, regulators should adopt appropriate policies to enable the market to reach a more efficient level by monitoring and improving the quality of information and facilitate their transmission to the market. The misevaluation opportunity enables market timers to sell overpriced stocks and purchase underpriced stocks. The findings also imply that investors should implement effective hedging strategies to mitigate the downside risk. In addition, the results suggest that investors should devise their trading strategies in falling and rising markets during the COVID-19 pandemic. Originality/value - There is meagre literature on the effect of the COVID-19 outbreak on the formation of herding behaviour among investors. Studies conducted on herd behaviour are widely focused on Shariah non-compliant stocks, only a few ones deal with Shariah-compliant stocks. The novelty of this paper consists in addressing this gap in the literature through examining the presence of herding behaviour on the part of investors in Shariah-compliant stocks in Malaysia before and after the COVID-19 outbreak.