Herd behaviour and asset pricing in the Indian stock market

We study the presence of aggregate herding in the Indian stock market and examine whether herding propensity qualifies to be a priced-risk factor for cross-sections of stocks. Using daily stock returns data, this paper shows that aggregate herding exists more significantly in large -cap stocks than in small-cap stocks. We further show that aggregate herding, as measured by crosssectional absolute deviations of returns, is a significant risk factor in determining the return generation process for stocks. In a multi-factor asset pricing framework, herding affects expected returns on sample stocks. The work shows empirical evidence to this effect across large-cap and small-cap stocks listed on the National Stock Exchange of India. (c) 2020 Published by Elsevier Ltd on behalf of Indian Institute of Management Bangalore. This is an open access article under the CC BY-NC-ND license. (http://creativecommons.org/licenses/by-ncnd/4.0/)