ABSTRACT
This paper investigates herding behaviour in China and Pakistan by using dynamic herding approaches and herding during extreme market movements. We use daily returns of the Shanghai stock exchange (SSE) and Pakistan stock exchange (PSX) from 2006 to 2021. Several models are used to study herding, such as least squares model, generalized linear model, and Bai and Perron’s structural change model. Overall, results through the linear model show that China has significant herding, but no herding is found in Pakistan. According to Bai and Perron’s model, herding is evident in two different regimes of both countries. The first regime shows herding during USA global financial crisis of 2008. The second regime was during the Hong Kong protest, which drove herding in China. In Pakistan, herding is found during political crisis and terrorism activities. From the perspective of extreme market movements, China and Pakistan both showed herding during 10% values. Contrary, no herding was found during 1% values, but Pakistan showed herding during 5% values at both extremes, and China only showed herding during the upper extreme. Hence, herding should be measured at 10% rather than 5% and 1%.
