Abstract
This article explores the dynamic interaction of mutual fund herding, investor sentiment, and market volatility using a Vector Autoregression approach. We investigate these relationships in both buy-herding and sell-herding across stock capitalization quintiles. The results point to investor sentiment and market volatility as the most prominent causes of buy-herding, and to market prices and investor sentiment as the main causes of sell-herding. Our results further indicate that herding behavior can affect market prices in most stock quintiles and market volatility in smaller stock quintiles. Our findings provide valuable insights that can facilitate financial regulation and the formulation of better financial market policies regarding the interactions of herding, sentiment, and market volatility. TOPICS:Mutual funds/passive investing/indexing, risk management, VAR and use of alternative risk measures of trading risk, quantitative methods, statistical methods, legal/regulatory/public policy, exchanges/markets/clearinghouses Key Findings ▪ Investor sentiment and market volatility are significant causes of buy-herding. ▪ Sentiment and market prices are significant causes of sell-herding; market volatility does not influence sell-herding. ▪ Buy-herding affects market volatility in smaller stocks; sell-herding does not affect market volatility statistically.
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