Herding where retail investors dominate trading: The case of Saudi Arabia

Abstract

We investigate herding in the Saudi stock market, where more than 95% of the total trading is initiatedby the individual investors. Based on readily available stock data, we find evidence of pervasive herdingamong the market participants. Although herding is prevalent irrespective of market conditions, it tendsto get stronger in periods when the market rises and the trading activity intensifies. Traders are foundto be indifferent to important stock categories in their herd behavior. Further analysis suggests that thecorrelated behavior of Saudi traders is unlikely to be induced by the common movements in fundamentals.Considering the unique composition of the market clientele, we interpret these findings as constitutingmarket level evidence supporting a commonly held belief in the literature that the individual investorsare more likely to be noise traders.