In this study, we test for the presence of investor herding behavior in the Tunisian stock market. Further, we explore the explanatory factors of the occurrence of the probability of stock market booms and busts by combining herding behavior of investors and economic and financial fundamentals. We find that investors exhibit different levels of herding behavior—herding strongly exists in both booms and busts of stock market. Our results show that herding behavior contributes to an increase in the probability of stock market booms. In addition, the economic and financial fundamentals lead to the emergence of Tunisian stock market boom-bust cycles.

Investor herding behavior is considered as an important issue because of its effects on fluctuations in returns and has been the behavioral explanation for the occurrence of stock market booms and busts. Research on the impact of herding behavior on the stock market boom and bust occurrence is expanding in developed countries.1 These studies defined herding behavior as a tendency among a group of investors to imitate the decisions of others or market consensus without basing their decisions on their own beliefs or information and pointed out that investor herding behavior leads to the occurrence of stock market booms and busts. There is also a growing body of evidence supporting the existence of a relationship between economic and financial fundamentals and stock market boom and bust occurrence.2

This paper aims to study if the herding behavior and the economic and financial fundamentals contribute to an increase in the occurrence of the probability of stock market booms and busts. In particular, we focus on detecting stock market booms and busts and herding behavior in the Tunisian stock market. To our knowledge, no research has investigated the explanatory factors of the occurrence probability of stock market booms and busts in Tunisia depending on the investor herding behavior and using the ordered logit model.

Applied Finance Journal, Investor Herding Behavior, Cross-Sectional Standard Deviation (CSSD), Stock Market, Tunisian stock marke, Boom-Bust Cycles.