UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business -------- Doan Thi Mai Phuong BEHAVIORAL FACTORS AFFECTING HERDING BIAS: THE CASE OF HO CHI MINH STOCK EXCHANGE, VIETNAM SUPERVISOR: Prof. Nguyen Dong Phong Dr. Nguyen Phong Nguyen HO CHI MINH CITY - 2015 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS CHAPTER 1: INTRODUCTION. Significance of the research.
Structure of the study. 8 CHAPTER 2: LITERATURE REVIEW. Review on some behavioral factors and herding bias in stock market. Illusion of control bias.
20 CHAPTER 3: RESEARCH METHODOLOGY. Scales measurement of Risk Tolerance. Scales measurement of Over-confidence. Scale measurement of Self-monitoring.
Scale measurement of Gambler’s Fallacy. Scale measurement of Illusion of control. 28 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Data collection methods.
Data analysis methods. Test of scale measurement reliability. Exploration factor analysis (EFA). 31 CHAPTER 4: DATA ANALYSIS AND FINDINGS.
Refinement of measurement scales. Result of Cronbach’s alpha analysis of formal survey (N=205). Testing the assumptions of regression. Results of hypothesis testing.
43 CHAPTER 5: CONCLUSIONS AND IMPLICATIONS. 57 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT The stock market is more and more unpredictable which traditional finance theories cannot give reasonable explanation.Behavioral finance, instead, can be helpful in the current situation of the fluctuating market. Herding activities among investors have been a popular behavioral explanation for the excess volatility and short term trends observed in financial market. However, the number of research focusing on herding and its impacts on the financial market, especially Vietnamese stock market, is limited.This research will identifythe behavioral factors affecting the herding bias existing at the HOSE since it was established (2000) and the impact levels of behavioral elements on the herding bias.
Using a data set form a sample of more than 200 investors, we find that investors’ decisions much depends on their own emotion rather than fundermental analysis and technical analysis. Moreover, investors generally prefer short-term portfolios (T+3) to long-term ones. In addition,due to the limited level of security understanding, investors usually consider the stock market as a “casino” where luck is the most vital element to win. On the other hand, investorswho are too confident about their investment decision usually make mistakes in their short-term investment.
Keywords: Herding behavior, behavioral finance. 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INTRODUCTION 1. Background Vietnamese stock market was formed in 1998 including Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX). At the very first stage, the Vietnamese stock market was launched on 28 July 2000 with merely 2 listed companies along with 4 security companies and the growth of the number of listed companies was quite slow.
Having passed so many ups- and-downs, there are currently 181 security-company members1after approximately 14 years. However, in comparison to other developed and emerging markets, Vietnamese stock market appears to be much smaller in terms of scale and maturity. Although the Ho Chi Minh City stock exchange (HOSE) has witnessed considerable developments both in the number of listed stocks and in transaction value for 14 years, the price movement seems to fluctuate unpredictably over different periods. Starting at 100 points in July 2000, after 1 year, at June 2001, the VN-Index was fivefold and reached the peak at 571 points.
Investors were too excited and dreamed of earning money quickly that the demand rose significantly while there were only few listed stocks in the market (Huy, 2010). However, it was the lack of knowledge and trading experience of investors as well as the insufficient support from the authorities which made VN-Index suddenly unceasingly fall until it reached the bottom at 139 points in March 2003 (Huy, 2010). Investors who joined the market in this period and could not jump out quickly had to face the financial difficulties because of the huge loss of assets. The stock market then seemed to fall in its hibernation status until 2005 and eventually woke up in 2006.
The boom started in the second half of 2006 and 1According to the latest available data as at 20 May 2014 on the websites of Ho Chi Minh City and Ha Noi stock markets 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com rocketed up to 1,170 points by March 2007. This fluctuated around 1,000 points until October 2007. The Ho Chi Minh City stock market had never been “hotter” than that time. Nevertheless, VN-Index went to its decline stage after being pushed up to the peak.
Ho Chi Minh City stock market experienced a gloomy year in 2008 and VN-Index merely stopped falling in February 2009 at 235 points (Huy, 2010). The possible explanations for the sharp dip of the VN-Index were the impacts of numerous factors, namely, tightening of monetary policies, especially lending for stock investment, high deposit interest rates, high inflation rate, and a recession of the United State economy. Moreover, lack of timely intervention by the authorities was also a breeding ground of the dramatically decrease of VN-Index (Vo and Pham, 2008). From 2009 to the first quarter of 2011, VN-Index continued to undergo many ups-and-downs, reached another peak at 542 points in May 2010 and another bottom at 351 points in November 2011.
Nonetheless, it seemed to fluctuate between 400 and 500 points with no significant amplitude found in 2012 and finally stood at 505 points on December 31st 2013, increasing by 23% compared to 2012 (Luyen, 2013).According to Phu(2010), one of the most important factor resulting in the fluctuation of stock prices is the herding bias. Specifically, when the price of stock increases, a huge number of investors begin buying with the hope that the price will continue to rise. However, the price only goes up to a specific point and after that will go down. When the price decreases, be afraid that the price decline unceasingly, almost investors will sell with high selling pressure.
In the other words, investors seem to takes action followed their psychology and emotion rather than rational mind which does not make the market complied with supply-demand rule and may lead to the collapse of the market. To explain these fluctuations during the period, I assume that herding bias may be the most important factor leading to this phenomenon in the case of Vietnamese stock markets; therefore, it should be analyze in depth. 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Regarding the theoretical background on behavioral factors and herding bias, if Expected Utility Theory (EUT) may be deemed by a fundamental theory of traditional finance, prospect theory is the basic theory of the behavioral finance. Prospect theory concentrates on subjective decision-making affected by the investors’ value system, while EUT focuses on investors’ rational expectations (Filbeck, Hatfield & Horvath, 2005).
EUT is the normative model of rational choices and descriptive model of economic behaviors, which dominate the analysis of decision making under risk. However, this theory is criticized for failing to explain why people are appealed to both insurance and gambling. People tend to under-weigh probable outcomes compared to certain ones and they differently response to the similar situation depending on the context of losses and gains in which they are presented (Kahneman & Tversky, 1979). Prospect theory describes some states of mine affecting an individual’s decision making process including Regret aversion, Loss aversion and Mental accounting (Waweru et al, 2003, p.
Based on the background, the problem statement would state my concern about the impact of behavioral factors on herding bias in the case of Vietnamese stock market. Problem statement Only recently established in 2000, the Vietnamese stock market is characterized by weak reporting requirements, poor regulations and low accounting standards (Tran and Truong, 2011). During the formulation and development process, the Vietnamese stock exchange in general and the HOSE in particular went through many different stages. Specifically, its prices fluctuate unpredictably and it seems difficult for investors to make rational decisions.
Despite the dramatic fluctuations of price through the period as well as the instability of the market, there have been few studies of the Vietnamese stock exchange, particularly dealing with herding issues. 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Although a variety of commentaries based on the conventional financial theories have been proposed, they failed to explain what happened at the HOSE over the past period. Alternatively, behavioral finance can be helpful in the case of the HOSE since it is based on the psychology to explain why people buy or sell stocks (Waweru et al. Behavioral factors include overconfidence, representativeness, availability, loss aversion, regret aversion, gamble’s fallacy, over-under reaction, herding and so on (Ritter, 2003).
Herding activities among investors have been a popular behavioral explanation for the excess volatility and short term trends observed in financial market (Juan Yao et al. Moreover, many studies carried out in Vietnamese stock market such as Farber et al (2006), and Tran (2007)identified that herding effect in this market is very strong, especially toward positive return of the market. Specifically, Farber et al (2006) conducted a study aboutthe impact of policy on Vietnam stock market and found out the empirical evidence for the well-known herding behavior among investors, by which people suppressed own private information and expectations to follow the market’s collective action. They also stated that “the trend of herding behavior is stronger toward extreme positive returns of the market, and in fact, around the consecutive sequence of limit-hits” (Farber et al, 2006, p.
Besides, Chen et al (2003) argued that herding was more likely to happen in emerging markets than developed ones as the government intervention was high, and the quality of information disclosure was low.Because of this intervention of the government, the market did not operate following the “demand-supply” rule; therefore, there was no random trend in the market. As regard the low quality of information disclosure in emerging markets, it was the fact that individuals in these markets did not have sufficient official information. Hence, they always followed the rumor or unofficial information, which resulted in the instability of markets. Kaminsky and Schmukler (1999) 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com asserted that during 1997-1998, Asian countries seemed to be driven by herding behavior; therefore, it was believed that the herding instinct was very strong in Vietnam.Tran and Truong (2011) shown that herding behavior in Vietnamese stock market was evident.
Specifically, investors had a tendency to follow the actions of those who were believed to be better informed. They argued that the inadequacy of the regulatory framework in Vietnamese market, for example, the lack of transparency or an efficient mechanism for reporting information prevented investors from collecting accurate and rapid firm-specific information for their own evaluation. Hence, this informational inefficiency together with a relatively high degree of market volatility might induce investors to make decisions based on consensus, which lead to higher correlations among stock returns. The dispersion among returns was, therefore, likely to decrease or at least increase at a decreasing rate.
As a result, herding was observed. Thus, the study aims to analyze herding effect and factors impacting it. To understand and give several suitable explanations for the herding bias in the Vietnamese stock market, it is vital to explore which behavioral factors affecting the herding bias at the HOSE and how these factors affect the herding bias. It would be useful for investors to understand common investment behaviors, from which justify their decisions for better returns.
Security companies can use this information for the better understanding about investors to forecast more exactly and issue better recommendations. Above all, stock price would reflect its true value and the HOSE would also become the yardstick of the economy prosperity as well as help corporations raise capital for production and expansion. Research question This research identifies the behavioral factors affecting the herding bias existing at the HOSE over the period surveyed since the HOSE was established (2000).