The Impact of Cultural Shocks on Investor Sentiment and Herding Behavior: An Evidence during COVID-19 Pandemic

Aims: This study investigates herding under covid 19 pandemic. Also, this research aims to measure the effect of investors' sentiment toward herding behavior moderated by culture shock in the emerging market stock exchange.

Study Design: This study uses a sample of stock that constitutes the liquid index in the emerging market.

Place and Duration of Study: The samples of this study are 26 countries incorporated in emerging stock markets. The observation is 10.192. The duration of the research is from December 2019 to June 2021.

Methodology: This Research uses the model of Chang et al. (2000) to estimate herding behavior as the dependent variable. The independent variable is investor sentiment measured by the VIX and VXEEM indices. Culture shock is assumed as a moderating variable measured by dummy variables. The variables of cultural shock are divided into three phases: the honeymoon phase at the beginning of the covid virus spreading, the lockdown phase, and the new normal phase. The data for culture shock is taken from WHO data. The research will be analyzed with Moderated Regression Analysis with EViews.

Results: The results of this study consist of the following: First, investors in capital markets in developing countries are proven to have anti-herding behavior in making investment decisions during the Covid-19 pandemic. Second, investor sentiment has influenced herding behavior during the Covid-19 pandemic. Lastly, the covid-19 pandemic condition has strengthened investor sentiment to carry out herding behavior, especially in the honeymoon phase or at the beginning of the pandemic. The novelty in this study is introducing the concept of cultural psychology, namely cultural shock as a variable believed to strengthen investor sentiment towards the capital market and cause herding behavior.

Conclusion: The results of this study provide helpful information for developing research in the financial and investor behavior in understanding investor behavior during the Covid-19 pandemic. Investor sentiment toward the possibility of a decline in capital market performance gives rise to irrational behavior (herding). In addition, cultural shocks to new habits during the pandemic can also strengthen investor sentiment and cause herding behavior. It should use a more comprehensive research sample from developed capital markets for further research.