Abstract
Herding behavior, i.e. the adjustment of a decision maker's behavior, opinion, or expectations due to real or illusionary (social) pressures, can be explained by numerous behavioral finance models, such as the cascade model or contagion. However, unambiguous empirical results are rare, mainly due to differing methodologies used in previous studies. We analyze the buying and selling activities of the managers of German mutual funds that primarily invest in equities over the period from 2000 to 2005. Our dataset covers about 70 percent of the total investments of all German equity mutual funds. Our results reveal that there is considerable herding behavior when mutual fund managers face market-wide cash inflows or cash outflows. In addition, mutual funds that only invest in German equities display stock-picking herding behavior when selecting which stocks to invest in.
Published Version
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