Abstract
This paper examines whether UK fund managers engage in herding behaviour in the stock market using the dynamic herding measure, whether their herding behaviour is different during bullish and bearish periods, whether most of their herding is informational, which types of informational reasons act as the main drivers of their herding and whether there are non-informational drivers of their herding. Our results reveal that UK fund managers engage in significant herding behaviour and that this behaviour does not differ significantly from bullish to bearish stock markets. Moreover, we confirm that there are weak positive correlations between fund managers? herding and stock returns within the subsequent year, which indicates that their herding is mainly informational. To improve portfolio performance, other investors could follow UK fund managers and purchase stocks overbought by them with at least 15 traders quarterly in the following one-year period, particularly for growth-type, sectorspecific and international-type funds. Moreover, because they are more likely to herd in large-capitalisation securities, the informational reasons driving managers? herding behaviour are mainly related to investigative herding. We also find that growth-type and international-type funds are more likely to herd with similar- type funds. This finding may result from reputational and characteristic herding, which illustrates that non-informational reasons for managers? herding still exist.
Highlights
Based on the dominance of mutual funds from western countries in the stock market, the influence of fund managers trading stocks in these countries on stock prices is significantly greater than that of other investors
Unlike the adjusted LSV measure developed by Wylie (2005) that functions on a semi-annual basis, this study extends the Sias (2004) model to use cross-sectional correlations of the fraction of UK fund managers increasing their positions over adjacent quarters to investigate whether these managers are engaged in herding behaviour
The herding behaviours of UK fund managers are based on value-relevant information, as proposed by Hung, Lu, and Lee (2010), but such informational herding is within the following year
Summary
Based on the dominance of mutual funds from western countries in the stock market, the influence of fund managers trading stocks in these countries on stock prices is significantly greater than that of other investors. UK mutual funds account for the highest proportion of European mutual funds, and their fund managers are dedicated to data collection, analysis and professional investment This phenomenon makes their stock selection strategies and trading behaviours more rational and informative than those of other investors. As a result of information asymmetry and agency problems, mutual funds sometimes follow their counterparts’ behaviours with regard to certain securities (Russ Wermers 1999). This so-called “herding” behaviour of fund managers in the stock market amplifies stock price volatility and drives prices away from fundamentals
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