Herding the Mutual Fund Managers in the Athens Stock Exchange

Abstract

1. Introduction has traditionally been based on a specific set of assumptions regarding human behaviour. These assumptions, known as VM (Von Neumann and Morgenstern) axioms, are highly questionable as a mode of behaviour, because they imply that investors are totally keen, penetrating and in calculating numbers that are required for making investment decisions (Frankfurter and McGoun, 2001). Nevertheless, due to their simplicity and suitability for advanced mathematical models, these assumptions have formed a foundation that had not been questioned for several decades. This approach is termed and its cornerstones are Expected Utility (EU), Efficient Market Hypothesis (EMH) and Capital Asset Pricing Model (CAPM) paradigms. Today, this point of view is less widespread and it has become less plausible. The reasons are extraordinary events of last two decades of twentieth century and primarily emergence of a new approach (De Bondt, 2004). The new approach attempts to reconsider concept of homo economicus altogether. The supporters of this point of view state that finance needs to be redefined so that it reliably represents actions of real people. According to Frankfurter et al. (2004), limitations of traditional model have become too obvious to be ignored. This line of thought has been called Finance by its supporters and draws many of its concepts from psychological findings regarding human behaviour. Limits to exercise of arbitrage that have been documented (Barberis and Thaler, 2002) further question validity of main argument of traditional approach, namely that deviations from model's prescriptions will quickly disappear. Although heavily disputed and still controversial (opponents of theory call it the anomalies literature) Behavioural (BF) is an idea that has shaken very foundations of traditional finance theory. BF does not refer to a single mode of human behaviour in order to explain phenomena, but rather on different human responses to various circumstances. Therefore, many different modes of behaviour that deviate from prescriptions of traditional finance have been formed into categories explained by specific psychological traits. One interesting phenomenon is termed and refers to tendency of people to imitate each other for various (rational or irrational) reasons when making decisions (Lemieux, 2003, 2004). Herding becomes more important if such behaviour is exhibited by finance professionals and experts, since they are purported to be most rational and efficient persons according to traditional approach. Should these individuals not verify traditional approach with their behaviour, paradigm cannot hold at all. Several studies have been conducted to investigate presence of herding by institutional investors and other professionals and results might be considered controversial. The present study attempts to investigate whether institutional herding can be established for mutual fund managers active in Athens Stock Exchange (or ASE). For this purpose, semi-annual holdings of 31 mutual funds trading in ASE between 2001 and 2006 have been gathered from mutual fund management companies and data have been analysed according to methodology proposed by Lakonishok et al. (1992). The analysis confirms existence of mutual fund managers' herding in ASE throughout period under examination. Furthermore, herding behaviour is documented primarily for large capitalisation and more renowned shares, leading to a set of questions regarding quality and maturity of market. The remainder of this paper is structured in following manner. Section 2 reviews theoretical concepts and empirical findings regarding Behavioural and especially herding. …