Abstract

This paper investigates whether herding behaviour contributes to stock market volatility at the NSE. First, the study evaluates whether herding behaviour exists at the Nairobi Securities Exchanges (NSE) and the nature of such behaviour. Secondly, it explores its implication on the stock market indicators demonstrating volatility. The study has utilized monthly data from 57 different firms listed in the NSE from January 2007 to December 2013. Both cross sectional standard deviation (CSSD) and cross sectional absolute deviation (CSAD) were employed as testing methodologies. Given basic and dynamic specifications, the study used panel data.Panel data on individual variables was used to estimate the non- linear models of both binary and continuous dependent variables. Coefficients by the two models have statistical significant influence on the stock price movement. Thus both models confirm the presence of herding patterns at the NSE which influence the stock price movement. Further, the analysis establishes that herding influences final corporate announcement. However, final corporate announcement exhibits a unique bilateral characteristic. In order to have proper market stability which is appealing to retail and corporate investors, the findings suggest that stock market players should critically consider these stock market parameters. These parameters are considered significant indicators of economic activity. Herding behaviour may spur unnecessary price volatility which is likely to destabilise the market and increase the fragility of a financial system.