Investigating the Determinants of Herd Behavior: an Application of the Hwang–Salmon Method to the Turkish Banking Sector

Abstract

Efficient financial markets are important for pricing assets at fair value. In an efficient market, investors are rational in the face of fast and accurate information flow, evaluate the information correctly, and reflect it in their pricing decisions. However, particularly in times of crisis and uncertainty, it is observed that some market participants hesitate in their decision-making processes, imitate the behavior of other individuals whom they consider reputable because they cannot rely on their own knowledge and experience, and try to follow the trend. This tendency, which is called herd behavior, destroys market efficiency and prevents correct price formation. Therefore, it is important to identify its determinants. The purpose of the study is analyzing the precense and determinants of herding behavior in the Turkish banking sector during the period 17.10.2017–10.11.2023. Herd behavior is identified using the Hwang–Salmon method, and logistic regression analysis and the Kruskal–Wallis test are applied to identify its determinants. The findings reveal that herding behavior is associated with the rise in risks and returns as well as the fall in interest rates and exchange rates.