DRIVERS OF HERDING BEHAVIOUR IN BANKING STOCKS LISTED IN THE LQ45 INDEX: EVIDENCE FROM THE INDONESIAN STOCK EXCHANGE

Abstract

This study aims to empirically examine the determinants of herding behavior, specifically the effect of market returns, market volatility, and trading volume on giant-capitalization banking stocks within the LQ45 index on the Indonesia Stock Exchange during the 2021–2025 period. Utilizing a quantitative approach, the study analyzes 1,205 daily observations. Herding behavior is detected using the Cross-Sectional Absolute Deviation (CSAD) model, estimated through split-sample multiple linear regression across bearish and bullish market regimes. The empirical findings demonstrate that herding behavior exclusively exists during bearish market conditions, as evidenced by a significant reduction in return dispersion during extreme market downturns. Conversely, no herding is detected during bullish trends. Furthermore, both market volatility and Trading Volume Activity (TVA) exhibit a significant negative effect on herding tendency across all market regimes; an increase in these variables actually widens return dispersion. This indicates that heightened market turbulence and trading activity stimulate a divergence of opinion and heterogeneous investment decisions rather than uniform collective actions. In conclusion, herd mentality in major banking stocks is primarily driven by psychological distress during market crashes, whereas high volatility and volume reflect rational, independent analytical strategies.