The Impact of Herding on the Risk Pricing in the Egyptian Stock Exchange

Mustafa Hussein Abd-Alla, Mahmoud Sobh

The Impact of Herding on the Risk Pricing in the Egyptian Stock Exchange

Číslo: 2/2020
Periodikum: Financial Assets and Investing
DOI: 10.5817/FAI2020-2-2

Klíčová slova: Fama and French Three-Factor Model; Herding Behaviour; State Space Model

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Anotace: We test the impact of herding behaviour on the risk pricing in the Egyptian Stock Exchange (EGX) by adding an additional risk factor reflecting herding behaviour to the Fama and French three-factor model. We construct a portfolio to mimic an additional risk factor related to herding behaviour, in addition to the original risk factors in the Fama and French three-factor model. The three-factor model will be tested in its original form and re-tested after adding the herding behaviour factor. The study is based on Hwang and Salmon methodology, in which the state space approach based on Kaman’s filter was used to measure herding behaviour. We used monthly excess stock returns of 50 stocks listed on the EGX from January 2014 to December 2018. The results do not support Fama and French model before and after adding the herding behaviour factor, therefore, there is no effect of herding behaviour on the risk pricing in the Egyptian Stock Exchange.