Cross-Sectional Absolute Deviation Approach for Testing the Herd Behavior Theory: The Case of the ASE Index

Abstract

This study aimed to test whether the herd behavior appears in the Amman Stock Exchange (ASE). Using data on a daily basis for a sample of companies in the Free Float Share Weighted Index during the study period from the beginning of the, 2000 to the end of August 2014 and using the Cross-Sectional Absolute Deviation (CSAD) Approach. The results found that the non-linear relationship between the cross sectional absolute deviation of the stock returns and the return of the market portfolio is an inverse relationship (γ3 = -0.179), so that the dispersion decreases with the increase in market rate of return, which means that investors during the study period were emulating the performance of the market without paying attention to the stock's characteristics regarding risk and return, which suggests that investors are taking the herd behavior. Keyword: