Herding Behaviour and Stock Market Efficiency: An Empirical Study in the Egyptian Stock Market

Abstrakt

This paper examines the impact of herding behaviour on the market efficiency in the Egyptian stock market, by testing the efficiency of a portfolio of stocks showing herding behaviour so that herding behaviour is statistically significant, and testing the efficiency of a portfolio of stocks does not show herding behaviour so that herding behaviour is not significant. The efficiency was tested using the Runs test and the Augmented Dick-Fuller test for Unit Root. Hwang and Salmon (2004) methodology was also applied to measure herding behaviour. Our comprehensive analysis revealed several key findings regarding market efficiency at the weak form. Firstly, Shapiro-Wilk and Kolmogorov-Smirnov tests indicated that stock prices for both portfolios are not normally distributed, suggesting a deviation from the assumptions of weak-form efficiency. Secondly, the Runs test conclusively showed that the time series for both portfolios are non-random, further demonstrating the market's inability to achieve a weak level of efficiency. Finally, the Augmented Dickey-Fuller (ADF) test confirmed the stationarity of the return series for both portfolios, unequivocally rejecting the presence of a unit root and reinforcing the conclusion of market inefficiency at the weak level.  Collectively, these results strongly reject the random walk hypothesis and demonstrate that the Egyptian stock market does not achieve weak-form efficiency, regardless of the presence or absence of herding behavior. This finding has significant implications for investors: it suggests that investors may be able to exploit past price information to potentially generate abnormal returns, as market prices do not fully reflect all available historical data.