Herding Behaviour and Equity Market Liquidity in the Johannesburg Stock Exchange

Abstract

This study tests the relationship between equity market liquidity and herding behaviour in the aggregate market portfolio in a South African context and found evidence of herding behvaiour when conditioned on liquidity. The “aggregate market portfolio” refers to the average consensus of all market constituents- in this case the JSE. The analysis is performed through liquidity quartiles on the whole sample period as well as in specific sub-periods with alternative measures of liquidity. The sample period covers January 2000 to December 2021. The results show that a higher level of equity market liquidity is associated with an increase in the tendency for investors to herd towards the market consensus (reduced return dispersions as a result of clustering around the mean market return). However, this research shows that the relationship is dependent on the time period analysed and that the relationship may no longer hold when the relative level of market liquidity (the distribution of daily market liquidity levels) changes