Investor Herding and Islamic Moral Economy and Finance: Evidence in the Islamic Banking Sector of the GCC Stock Market

This study examines the herding behavior in Islamic banking sector of the Gulf Cooperation Council countries (GCC countries). We examine in this paper the impact of the conventional banking sector on the herding behavior on Islamic banking sector. As well, we study the nexus between herding behavior and Islamic moral finance and economy. Based on daily data ranging from January 5, 2015, to September 4, 2023, and by using the methodology of Chang et al. (2000), we conclude the evidence of herding behavior at lower tail of the distribution. When we consider the possibility of existence of asymmetries between downward and upward market periods, we conclude that there is evidence of herding in Islamic banking sector only at the lower tail of the distribution during down market period. The study also shows the interdependencies between Islamic and conventional banking sector, and that the dispersion in conventional banking returns influence the Islamic banking returns. Also, we find that Islamic banking sector herd around conventional banking sector during down market period at upper tail only. This may be due to the non-confidence of investors in Islamic sector to rely on their decisions to the conventional banking sector. Finally, based on the DCC-GARCH model, we find a dynamic condition correlation between cross sectional absolute deviation CSAD and Islamic Financial Indicator in the short and long term.