Investor Sentiment and Herding Behavior in the Korean Stock Market
Round 1
Reviewer 1 Report
The central idea of the paper (herding behaviour) is potentially interesting. methodology, and data used in the article is clearly presented, but Authors should explain why KOSPI200 index (to measure investor sentiment) is used?. The Conclusion chapter should be extended.
Author Response
Response Letter (ijfs-780254)
Dear Editor,
We would like to thank you for giving us the opportunity to revise and resubmit our paper. We would also like to thank the Reviewer for the constructive comments, which we have carefully addressed in the attached revision. We feel that the manuscript now is greatly improved.
In what follows, we address the comments raised by the Reviewer. Part or all of those responses have been added to the revised manuscript. We are available should you need any further information. All changes are in the yellow highlight in the revised manuscript.
Yours sincerely,
The authors
Ms. Ref. No.: ijfs-780254
Title: “Investor sentiment and herding behaviour in the Korean stock market” submitted to the International Journal of Financial Studies, Special Issue “Advances in Behavioural Finance and Economics”
Response to the Reviewer #1 (ijfs-780254)
The central idea of the paper (herding behaviour) is potentially interesting. methodology, and data used in the article is clearly presented,
RESPONSE: Dear Reviewer, thank you for appreciating our submitted work and for providing us helpful comments to improve it.
(1) Authors should explain why KOSPI200 index (to measure investor sentiment) is used
RESPONSE: The volatility index is calculated based on KOSPI200 option and announced by the Korea Exchange. Thus, we revised the sentence. (p.5, l. 150)
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VKOSPI is Korea’s representative implied volatility index based on the KOSPI200 option. |
(2) The Conclusion chapter should be extended.
RESPONSE: We extended the conclusion. (p.13, l. 381)
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This study contributes to the existing literature conducting a thorough analysis of herding in the Korean stock markets under different market conditions, also introducing the investor sentiment in herding behaviour model. Our results provide useful information for investors and regulators, especially during down-market and high-trading volume periods, and can be helpful in hedging. Future research can analyse different investor sentiment index and study whether herding behaviour is affected by different factors (macro information) apart from sentiment. Because herding behaviour occurs in extreme events (financial crisis, recession), if the copula model considering extreme events is applied, new evidence may be presented in the stock market. |
We thank the Reviewer for the detailed review of our manuscript, and we hope that this revision addresses his/her concerns.
Reviewer 2 Report
Investor sentiment and herding behavior in the Korean stock market
Summary of the manuscript.
This paper analyzes if there is herding behavior in the Korean stock market and if investor sentiment can be a factor in driving herding behavior. The authors apply a cross sectional absolute deviation approach and quintile regression methodology to capture herding behavior. The authors conclude that herding behavior occurs in periods of down markets or in extreme market conditions. The authors also identify that investor sentiment is one important factor that can lead to herding behavior.
Suggestions.
1) The authors measure herding behavior following Chang et al. (2000, JBF) which is an extension to Christie and Huang (1995, FAJ). A reader unfamiliar with these articles will find it hard to follow the logic behind the methodology in the current manuscript. Some more detail explaining why the specified return patterns arguably indicate herding and sentiment would be very helpful. For instance, Korean investor sentiment is proxied by the volatility index of the KOSPI200. A short explanation why this measure is chosen would be very helpful.
2) It would be helpful if the authors also gave a short summary of their main findings, the answer to their question (the conclusion) and their contribution to the related literature also in the introduction of the manuscript.
3) In equation (3) and (4) it seems like the variable D have different definitions. In equation (3) D = 1 when the market return is negative and in (4) D =1 for periods with low trading volume. This becomes confusing as it is possible to have a period with negative return and high trading volume.
4) There are many equations in the manuscript. It would be helpful for the reader if the authors referred directly to the equation numbers in the empirical results section.
5) Some of the sections in the manuscript overlap. A clearer distinction between related literature, data, methodology, and results would improve the readability of the manuscript.
The manuscript raises some interesting questions about herding behavior and investor sentiment. The manuscript makes a novel contribution to the literature looking at investor trading patterns. The suggestions are only minor and mainly focused on pinpointing important details to improve readability.
Author Response
Response Letter (ijfs-780254)
Dear Editor,
We would like to thank you for giving us the opportunity to revise and resubmit our paper. We would also like to thank the Reviewer for the constructive comments, which we have carefully addressed in the attached revision. We feel that the manuscript now is greatly improved.
In what follows, we address the comments raised by the Reviewer. Part or all of those responses have been added to the revised manuscript. We are available should you need any further information. All changes are in the yellow highlight in the revised manuscript.
Yours sincerely,
The authors
Ms. Ref. No.: ijfs-780254
Title: “Investor sentiment and herding behaviour in the Korean stock market” submitted to the International Journal of Financial Studies, Special Issue “Advances in Behavioural Finance and Economics”
Response to the Reviewer #2 (ijfs-780254)
This paper analyzes if there is herding behavior in the Korean stock market and if investor sentiment can be a factor in driving herding behavior. The authors apply a cross sectional absolute deviation approach and quintile regression methodology to capture herding behavior. The authors conclude that herding behavior occurs in periods of down markets or in extreme market conditions. The authors also identify that investor sentiment is one important factor that can lead to herding behavior.
RESPONSE: Dear Reviewer, thank you for appreciating our submitted work and for providing us helpful comments to improve it.
1) The authors measure herding behavior following Chang et al. (2000, JBF) which is an extension to Christie and Huang (1995, FAJ). A reader unfamiliar with these articles will find it hard to follow the logic behind the methodology in the current manuscript. Some more detail explaining why the specified return patterns arguably indicate herding and sentiment would be very helpful. For instance, Korean investor sentiment is proxied by the volatility index of the KOSPI200. A short explanation why this measure is chosen would be very helpful.
RESPONSE: According to your comment, we have added more explanation to section 3. (p.5, l. 150-154)
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VKOSPI is Korea’s representative implied volatility index based on the KOSPI200 option. This volatility index is generally known as a fear index and is used as a proxy for investor’s sentiment (Smales, 2017; Economou et al., 2018). When the volatility index is lower, the investor is the more optimistic, while the volatility index is higher, the investor is the more pessimistic. |
2) It would be helpful if the authors also gave a short summary of their main findings, the answer to their question (the conclusion) and their contribution to the related literature also in the introduction of the manuscript.
RESPONSE: We have added a short summary in the introduction. (p.2, l. 64-70)
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This paper analyses the Korean stock market, including KOSPI and KOSDAQ, and new evidence into developing stock markets. We find evidence of herding behaviour during down-market periods. Also, our results suggest that herding behaviour in the Korean stock market is influenced by investor sentiment. This study contributes to the existing literature conducting a thorough analysis of herding in the Korean stock markets under different market conditions, also introducing the investor sentiment in herding behaviour model. Our results provide useful information for investors and regulators, especially during down-market and high-trading volume periods, and can be helpful in hedging. |
3) In equation (3) and (4) it seems like the variable D have different definitions. In equation (3) D = 1 when the market return is negative and in (4) D =1 for periods with low trading volume. This becomes confusing as it is possible to have a period with negative return and high trading volume.
RESPONSE: In equation (3) and (4) the dummy variable D have different definitions. Equation (3) is an analysis of whether the market is up or downstate, and Equation 4 is an analysis of high and low trading volume. Because each equation has different definitions, Equation (3) and (4) were analyzed respectively. The results are shown in Tables 3 and 4.
4) There are many equations in the manuscript. It would be helpful for the reader if the authors referred directly to the equation numbers in the empirical results section.
RESPONSE: We added an equation number for each empirical results sentence.
5) Some of the sections in the manuscript overlap. A clearer distinction between related literature, data, methodology, and results would improve the readability of the manuscript.
RESPONSE: We checked the structure of the manuscript to improve the readership.
The manuscript raises some interesting questions about herding behavior and investor sentiment. The manuscript makes a novel contribution to the literature looking at investor trading patterns. The suggestions are only minor and mainly focused on pinpointing important details to improve readability.
RESPONSE: We thank the Reviewer for the detailed review of our manuscript, and we hope that this revision addresses his/her concerns.
Reviewer 3 Report
This paper studies herding behavior in Korea stock market, including how the behavior is different in different market conditions such as different volumes and volatility environments, as well as during different investor sentiment. Overall the analysis is interesting and the presentation of the research is of good quality. The only comment I have is following:
page 3, line 128: please explain a bit more detail about what each sample is. For instance, does each sample correspond to a stock return time series(which I assume is).
Author Response
Response Letter (ijfs-780254)
Dear Editor,
We would like to thank you for giving us the opportunity to revise and resubmit our paper. We would also like to thank the Reviewer for the constructive comments, which we have carefully addressed in the attached revision. We feel that the manuscript now is greatly improved.
In what follows, we address the comments raised by the Reviewer. Part or all of those responses have been added to the revised manuscript. We are available should you need any further information. All changes are in the yellow highlight in the revised manuscript.
Yours sincerely,
The authors
Ms. Ref. No.: ijfs-780254
Title: “Investor sentiment and herding behaviour in the Korean stock market” submitted to the International Journal of Financial Studies, Special Issue “Advances in Behavioural Finance and Economics”
Response to the Reviewer #3 (ijfs-780254)
This paper studies herding behavior in Korea stock market, including how the behavior is different in different market conditions such as different volumes and volatility environments, as well as during different investor sentiment. Overall the analysis is interesting and the presentation of the research is of good quality.
RESPONSE: Dear Reviewer, thank you for appreciating our submitted work and for providing us helpful comments to improve it.
(1) The only comment I have is following:
page 3, line 128: please explain a bit more detail about what each sample is. For instance, does each sample correspond to a stock return time series (which I assume is).
RESPONSE: According to your comment, we revised the sentence. (P.3, l.140-142).
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We use daily data for KOSPI and KOSDAQ constituent securities between January 2003 and December 2018. This corresponds to 3,958 daily closing prices. These data were obtained from Informax. |
We thank the Reviewer for the detailed review of our manuscript, and we hope that this revision addresses his/her concerns.
Reviewer 4 Report
This study analyses whether herding behavior exists in Korean stock markets and the relationship between herding behavior and investor sentiment in the KOSPI and KOSDAQ stock markets.
This study has conducted adequate design and the necessary methods to examine this issue. The results are illustrated clearly. I suggest acceptancy after adding a few supplementary descriptions.
1.KOSPI and KOSDAQ may be well known for you and most readers, However, I suggest you give a brief description for them to smooth text.
2. In literature review: "... the LSV model, Portfolio Change Measure (PCM), Cross-Sectional Standard Deviation (CSSD), and Cross-Sectional Absolute Deviation (CSAD) (Lakonishok et al., 1992; Grinblatt et al., 1995; Christie and Huang, 1995; Chang et al., 2000). Until recently, however, the most popular approach has been the CSAD."
Could you give us (readers) a brief explanation of why you use CSAD, too? what are the disadvantages or problems of the other measurements?
3."Demirer and Kutan (2006) reported that there was no herding behavior in the Shanghai and Shenzhen stock markets. However, Tan et al. (2008) and Chiang et al. (2010) found that there was herding behavior in the Shanghai and Shenzhen A stock markets."
This is not a good literature review. After I read this description, I got nothing. why do they get different results? What is the truth or why/what to lead to that?
4. page 3, line 112. "... an empirical analysis of the Korean stock market is insufficient." => I wonder whether there were no local studies to examine herding behaviors in Korean stock markets?
5. page 3, line 129. the authors employ Korean investor sentiment VKOSPI (volatility index of KOSPI200). However, I (other readers) have no idea about VKOSPI. what and How does the index constitute? How can I interpret the sentiment index? You don't give us any idea? The higher the index, the more pessimistic the investors? or more optimistic?
6. Eq. 7, a serious problem: miss the square sign. Check, and then you will see.
7. format check. e.g., line 361: Journal of economic perspectives. => Journal of Economic Perspectives.
Capital or lowercase should be consistently used in journal names.
Author Response
Response Letter (ijfs-780254)
Dear Editor,
We would like to thank you for giving us the opportunity to revise and resubmit our paper. We would also like to thank the Reviewer for the constructive comments, which we have carefully addressed in the attached revision. We feel that the manuscript now is greatly improved.
In what follows, we address the comments raised by the Reviewer. Part or all of those responses have been added to the revised manuscript. We are available should you need any further information. All changes are in the yellow highlight in the revised manuscript.
Yours sincerely,
The authors
Ms. Ref. No.: ijfs-780254
Title: “Investor sentiment and herding behaviour in the Korean stock market” submitted to the International Journal of Financial Studies, Special Issue “Advances in Behavioural Finance and Economics”
Response to the Reviewer #4 (ijfs-780254)
This study analyses whether herding behavior exists in Korean stock markets and the relationship between herding behavior and investor sentiment in the KOSPI and KOSDAQ stock markets.
This study has conducted adequate design and the necessary methods to examine this issue. The results are illustrated clearly. I suggest acceptancy after adding a few supplementary descriptions.
RESPONSE: Dear Reviewer, thank you for appreciating our submitted work and for providing us helpful comments to improve it.
(1) KOSPI and KOSDAQ may be well known for you and most readers, However, I suggest you give a brief description for them to smooth text.
RESPONSE: We have added an explanation. (p.3, l. 135-139)
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The KOSPI market is a benchmark stock market of Korea and is a market where blue-chip companies with listing requirements are mainly traded. The KOSDAQ market is for the purpose of providing funds for startup companies as well as SMEs in such tech-savvy area as IT (information technology), BT (bio technology) and CT (culture technology) and is a market where stocks of startup companies and SMEs are traded. |
(2) In literature review: "... the LSV model, Portfolio Change Measure (PCM), Cross-Sectional Standard Deviation (CSSD), and Cross-Sectional Absolute Deviation (CSAD) (Lakonishok et al., 1992; Grinblatt et al., 1995; Christie and Huang, 1995; Chang et al., 2000). Until recently, however, the most popular approach has been the CSAD."
Could you give us (readers) a brief explanation of why you use CSAD, too? what are the disadvantages or problems of the other measurements?
RESPONSE: According to your comment, we have added more explanation to section 2. (p.2, l. 81-82)
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~ since other measurement methods require investor’s holding information and use low-frequency data. |
(3) "Demirer and Kutan (2006) reported that there was no herding behavior in the Shanghai and Shenzhen stock markets. However, Tan et al. (2008) and Chiang et al. (2010) found that there was herding behavior in the Shanghai and Shenzhen A stock markets."
This is not a good literature review. After I read this description, I got nothing. why do they get different results? What is the truth or why/what to lead to that?
RESPONSE: According to your comment, we revised the contents of the existing study. (p.2, l. 87-92)
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Tan et al. (2008) and Chiang et al. (2010) found that there was herding behaviour in the Shanghai and Shenzhen A stock markets. Yao et al. (2014) reported that there was a stronger presence of herding behaviour in the Chinese B stock market than in the Chinese A stock market. Lao and Singh (2011) found that herding behaviour exists in the Chinese stock market. When the market is down-market and trading volumes is high, herding behaviour is stronger. |
(4) page 3, line 112. "... an empirical analysis of the Korean stock market is insufficient." => I wonder whether there were no local studies to examine herding behaviors in Korean stock markets?
RESPONSE: We have added the explanation. (p.3, l. 121-123)
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Chang et al. (2000), Chiang and Zheng (2010), and Laih and Liau (2013) analysed KOSPI market, but there is a lack of empirical research that only analyses the Korean stock markets (KOSPI and KOSDAQ). |
(5) page 3, line 129. the authors employ Korean investor sentiment VKOSPI (volatility index of KOSPI200). However, I (other readers) have no idea about VKOSPI. what and How does the index constitute? How can I interpret the sentiment index? You don't give us any idea? The higher the index, the more pessimistic the investors? or more optimistic?
RESPONSE: According to your comment, we have added more explanation to section 3. (p.5, l. 150-154)
|
This volatility index is generally known as a fear index and is used as a proxy for investor’s sentiment (Smales, 2017; Economou et al., 2018). The lower the volatility index, the more optimistic the investor is, while the higher the volatility index, the more pessimistic the investor is. |
(6) Eq. 7, a serious problem: miss the square sign. Check, and then you will see.
RESPONSE: According to your comment, we modified the Eq. 7. (p.7, l. 241)
(7) format check. e.g., line 361: Journal of economic perspectives. => Journal of Economic Perspectives.
Capital or lowercase should be consistently used in journal names.
RESPONSE: We modified the journal names consistently. (p.13, l. 403)
We thank the Reviewer for the detailed review of our manuscript, and we hope that this revision addresses his/her concerns.
