The Effect of Herding Behavior and the Sentiments of Investors on Taiwan Stock Index Futures

This paper addresses the impacts of sentiment variables and herding behavior on spot markets within the context of Taiwan Stock Index Futures. We examine the variance in the rates of return of the Taiwan index futures based on 14 sentiment variables. These 14 variables include the sentiment variables in the spot, futures, and options markets. This paper further examines whether the results are consistent during bear and bull market periods. This study uses the cross-sectional absolute deviation (CSAD) model and the state space model to measure the herding behavior phenomenon in the spot market in Taiwan. Our results reveal that herding behavior is present in the Taiwan stock market, with empirical results showing that the index returns on futures fall when herding behavior mitigates in the stock market and rise when herding behavior is prevalent in the stock market. Notably, sharp decreases in futures returns are associated with decreased herding behavior and lower futures returns. This finding may reflect a higher degree of uncertainty during downward price movements. The present study finds consistency in analysis results during both bull and bear market periods.