The Impact of Herding Behavior in the Indian Stock Market during the 2025 US–China Trade Dispute

Abstract

 

This study investigates herding behavior in the Indian stock market by analyzing high-frequency hourly data from the BSE 500 during the first quarter of 2025, during the period of rising global tension caused by the 2025 trade conflict between the US and China. The study utilized two distinct methodologies: the Cross-Sectional Standard Deviation (CSSD) model developed by Christie and Huang (1995) and the more robust Cross-Sectional Absolute Deviation (CSAD) model proposed by Chang et al. (2000). Our empirical findings were mixed but ultimately pointed to the presence of herding. The CSSD model indicated an absence of herding, showing that equity return dispersions tended to increase during periods of extreme price movements. However, the CSAD model uncovered strong evidence of herding, with a statistically significant negative coefficient. A detailed analysis revealed that this behavior was prevalent in both rising and falling markets. Specifically, herding was found during significant downward market movements, suggesting it is often a fear-driven response. This effect was notably absent during the most extreme crashes and was not statistically significant during extreme upward rallies. These results challenge the notion of a fully rational Indian market and highlight that external geopolitical events—like international conflicts , providing valuable insights for investors and regulators.