Institutional Herding Research Articles

Herding in the strategic allocations of Spanish pension plan managers

This paper empirically examines herding behavior in the strategic style allocations of Spanish pension plan managers. The study uses both the standard metric used in financial literature to capture institutional herding and a new approach to address some shortcomings of this traditional measure. Concretely, some authors have highlighted that the traditional measure does not take into account that the probability that a manager buys rather than sells a certain stock depends on both the initial holding in the stock and the asset flows. As a consequence, this study proposes a new approach, which can be applied to other financial markets and provides more accurate values of the probability to increase (or decrease) the style exposures bearing in mind the previous exposure of each portfolio. The study confirms the existence of herding behavior by using both methods. Although the strength of this behavior decreases using the new approach, the herding levels detected in this study of style herding of Spanish pension plans are higher than those of previous research analyzing portfolio holdings in other countries. Additionally, herding levels are higher in periods of low volatility while market returns does not seem to influence herding levels.

Institutional Herding in the Corporate Bond Market

We find substantial herding in U.S. corporate bonds among bond fund managers, much higher than that previously documented for the equity market. Herding is generally stronger among illiquid bonds, and buy herding and sell herding are driven by different factors. In particular, sell herding increases on negative news about bond ratings and corporate earnings. Interestingly, increases in ex-post transparency in corporate bond trading through Trade Reporting and Compliance Engine (TRACE) led to higher buy herding but not to higher sell herding. Finally, we find significant return reversals in the post-herding quarters, especially for sell herding and for junk bonds. Price reversal is most prominent when funds herd to sell illiquid bonds, which suggests that temporary price pressure is the reason behind price reversal.

Did institutions herd during the internet bubble?

We examine the trading behavior of institutional investors during the internet bubble and crash of 1998–2001, and its impact on stock prices. Similar to some recent findings concerning the trading behavior of hedge funds and NASDAQ 100 stocks, we find that during the bubble all types of institutions herded with great intensity into internet stocks for a comprehensive sample of institutional investors and internet stocks. In addition to this, we present three entirely new results. First, institutional herding was much greater than what can be explained by momentum trading. Second, institutions as a group continued to increase their holdings of internet stocks for two quarters past the market peak during the first quarter of 2000, and three quarters past the peak for individual stock prices, suggesting that institutions were unable to time the price peaks. Finally and most importantly, we find positive abnormal returns contemporaneous with institutional herding and negative abnormal returns (reversals) at the point that herding ceased. This finding suggests that institutions’ trading created temporary price pressures, and may have contributed to the bubble.

Circadian changes in heat storage and heat loss through sweating and panting in Karan Fries cattle during different seasons

In order to find out the circadian variations in physiological responses, heat storage and heat loss, experiment was conducted on 12 female Karan Fries (KF) cattle selected from National Dairy Research Institute (NDRI) herd. Animals were further divided equally in two groups namely growing (8–12 months) and adults (18–24 months), and experiment was conducted during winter (December to January), spring (February to March) and summer (April to May) seasons. Physiological responses (respiration rate (RR), rectal temperature (RT), skin temperature (ST) and pulse rate (PR)), heat storage and heat loss through evaporation from skin (sweating) and pulmonary system (panting), dry bulb temperature (DBT) and wet bulb temperature (WBT), relative humidity, minimum and maximum temperatures, wind speed and temperature humidity index were calculated at 4-h intervals round the clock. Physiological responses (RR, RT, ST and PR) increased significantly (p < 0.01) during spring and summer season. RR and PR were positively correlated with DBT. The circadian rhythmic variations in core temperatures during summer season were 1.0°C and 1.4°C, respectively, for adult and growing KF cattle. Heat loss through skin and pulmonary system was maximum in adult (76.8% and 23.2%) during summer at 2 pm compared to growing (73.9% and 26.1%). Heat storage was found to be maximum in adult than growing during all seasons. Heat storage increases as the intensity of solar radiation increases, and also higher is the surface area higher is the heat storage. Therefore, the experiment was conducted to study the influence of heat stress during the different periods in crossbred cattle.

Institutional Herding in Stock Markets: Empirical Evidence from French Mutual Funds

Using the herding measures of Lakonishok, Shleifer and Vishny (1992) (LSV) and Frey, Herbst and Walter (2007) (FHW), we assess herding by French equity mutual funds between 1999 and 2005. We show that LSV herding amounts to 6.5% while FHW herding is about 2.5 times stronger. We observe that herding is stronger in small than in medium and large capitalization firms. Herding is also more severe among foreign than among UE-15 or French stocks. Moreover, French mutual funds are shown to partially use positive feedback strategies. Finally, we obtain that sell-herding have a destabilizing impact on stock prices.

Herding the Mutual Fund Managers in the Athens Stock Exchange

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. …

Identifying and Overcoming Behavioural Impediments to Long Term Responsible Investment: A Focus on UK Institutional Investors

As society’s expectations about the appropriate behaviour of corporations has shifted over time, so too has the focus on what role institutional investors might play through the investment mechanism. This thesis focuses on the behavioural impediments to the adoption and effective implementation of responsible investment practices from the institutional investor’s perspective. Studies of behavioural finance that identify investor inefficiencies have been employed to consider how these might impact on an institutional investor’s ability to invest in a long-term responsible manner. The research draws from three case studies on UK institutions that have adopted a responsible investment policy and finds evidence of short-termism, herding/gravitation towards defensible decisions and ‘separateness’ of longer-term, governance and responsibility issues from the core investment process. A unified framework of conventions has been developed and applied to study the dominant conventions, investment beliefs and the justification process that contribute to these behavioural shortcomings. These analyses revealed that the external conventions of short-termism, over-emphasis on relative asset-based index returns and valuation models heavily weighted towards tangible financial criteria are reinforced by internal conventions within institutions including the performance review process, team responsibilities, team interactions and criteria used for manager selection. The process by which sub-optimal conventions might change is discussed through an evolutionary conventions lens, focusing on the problems with, and alternatives to, the prevailing convention of measuring and rewarding portfolio performance on the basis of returns relative to an asset-based index/benchmark. Finally, some of the scholarly contributions of this thesis will be discussed, including the links forged between the SRI, behavioural finance and portfolio theory literature, as well as the potential contribution that the conventions framework could make to future research on institutional herding.

The price impact of foreign institutional herding on large-size stocks in the Taiwan stock market

This study constructs a panel threshold regression model to explore the price impact of foreign institutional herding of firms listed in the Taiwan Stock Exchange during January 2000 to June 2008. Our panel threshold model is constructed to explore the price impact of foreign institutional investors’ herding in the Taiwan stock market after controlling the firm size. By examining the presence of threshold effect, this study analyzes whether firm size would obviously and asymmetrically affect the explanation for the effect of changes in foreign investors’ share ownership on abnormal returns. The empirical results of this study find the significant evidence of threshold effect which divides the stocks into large-size and small-size firms. It is found that foreign institutional investors in the Taiwan stock market tend to hold large-size stocks listed in the Taiwan Stock Exchange. There is an apparent increase in the subsequent abnormal returns on large-size stocks bought in bulk by foreign investors. The signals of changes in share ownership initiated by foreign institutional investors would reveal further information for improving the performance of asset reallocation decisions in Taiwan. The panel threshold model constructed in this paper well describes the price impact of institutional herding yet eschews the possibly subjective data snooping issue resulting from the two-pass sorting method as proposed by previous related researches.

Market Liquidity and Institutional Trading During the 2007-8 Financial Crisis

This paper shows that institutional sell-side herding increased bid-ask spreads and liquidity risk during the 2007-8 financial crisis. Such an impact on liquidity is most pronounced in firms with large numbers of institutions that sold the same stocks, that is, have correlated trades. For the same reason, we find institutional investors with a dedicated, buy-and-hold, investment style to be the least likely to herd; their trading activity did not affect stock market liquidity during the crisis. Our results are robust to alternative explanations, different test specifications and consistent with recent theories highlighting the negative impact of institutional trading activity on market liquidity during a crisis.

Animal breeding in India - a time for reflection, and action

Animal breeding in India - a time for reflection, and action

INSTITUTIONAL TRADING AND OPENING PRICE BEHAVIOR: EVIDENCE FROM A FAST-EMERGING MARKET

Using daily and intraday data, we investigate the cross-sectional relation between stock prices and institutional trading in the Taiwan stock market. Consistent with the investigative herding hypothesis, we find that institutional herding exists because of institutional positive feedback trading behavior rather than following trades made by other institutions, as suggested by the information cascade hypothesis. Moreover, the positive correlation between institutional trade imbalance and stock returns mainly comes from institutional positive feedback trading. The institutional trading decisions rely on returns measured not only over the lagged trading day but also over the opening session during the same day.

The Price Impact of Institutional Herding

We develop a simple model of the price impact of institutional herding. The empirical literature indicates that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We offer a theoretical resolution to this dichotomy. In our model, career-concerned money managers trade with security dealers endowed with market power and exhibit an endogenous tendency to imitate past trades. This tendency is exploited by dealers and thus affects prices. In equilibrium, institutional herding positively predicts short-term returns but negatively predicts long-term returns. Our article also generates several new, testable predictions that link institutional herding with the time-series properties of returns and volume.

Do Institutional Investors Herd in Emerging Markets? Evidence from the Taiwan Stock Market

This study employs daily trading data to examine the herding behavior of institutional investors in Taiwan’s stock market. Our results show evidence of herding for institutional investors; indeed, they would follow both other institutional trades and their own trades. We also find that institutional investors are not driven principally by impulse or instinct and that “herded into” stocks do not exhibit unusual return reversals. Moreover, the intensity of herding is negatively related to firm size, which suggests that institutional herding in Taiwan’s stock market is driven primarily by information cascades. Keywords: Institutional investor, Herding behavior, Information cascade, Emerging markets JEL Classifications : G11, G20, N25

Informational Herding by Institutional Investors: Evidence from Analyst Recommendations

We study the price impact of daily institutional herding induced by information events. Using analyst recommendation changes as a proxy, we find that institutional herding on recommendation changes is short–lived. Daily institutional herding, on average, destabilizes price. However, herding accompanied by information arrival has the opposite effect. We find no evidence of price reversal when institutional investors herd in the direction of the recommendation change, but rather herding speeds up price adjustment. Consistent with informational herding models, we provide evidence that efficient price discovery and institutional herding are not mutually exclusive.

Institutional Herding and Information Cascades: Evidence from Daily Trades

Using daily trade and quote data, we test whether institutional trading patterns are consistent with Avery and Zemsky’s (1998) theoretical model of information cascades. Consistent with theory, we find variables proxying for information asymmetry to positively predict increased levels of institutional herding at high frequencies and that herding levels increase when estimated over shorter horizons. Days with high levels of herding are subsequently followed by price reversals but these are limited to those stocks where trading is believed to be informative. The paper also shows that the daily trade and quote data provides similar estimates of herding as previously estimated from quarterly holdings data.

Subfertility in Males: An Important Cause of Bull Disposal in Bovines

The study had two objectives, namely, to estimate the andrological disorders leading to disposal of Karan Fries (KF), Sahiwal cattle and Murrah buffalo bulls and to study the effect of various factors (species/breeds, season of birth and period of birth) on male reproductive parameters. Records on occurrence of subfertility problems and disposal pattern of bulls maintained at the National Dairy Research Institute herd were collected for 15 years (1991 to 2005). Percentage of bulls producing freezable semen was less in the crossbred cattle (58.46%) as compared to Sahiwal (81.69%) and Murrah bulls (81.05%). Various subfertility traits like poor libido and unacceptable seminal profile were found to be the significant reasons (p<0.01) for culling of the breeding bulls. Inadequate sex drive was the main contributing factor for bull disposal in Sahiwal (22.55%) and Murrah bulls (15.12%) whereas poor semen quality and freezability were most frequently observed in KF bulls (24.29 and 7.29 percent, respectively). Least squares analyses of different male reproductive parameters showed that species/breeds had significant effect (p<0.05) on all traits except for frozen semen production periods (FSPP). Periods of birth were significantly different (p<0.05) for all traits except for semen volume. Age at first semen collection (AFSC), age at first semen freezing (AFSF) and age at disposal (AD) were highest in Murrah, while frozen semen production period (FSPP) and semen production period (SPP) were highest in KF and lowest in Sahiwal. The age at first semen donation and breeding period could be reduced by introducing the bulls to training at an early age. These results revealed a declining trend in AFSC, AFSF, FSPP, SPP and AD, thereby indicating an improvement in reproductive performance over the years. The age at first semen donation in bovines can be reduced by introducing the young male calves to training at an early age, which could increase the dosage of semen obtained from each male.

Herd mentality and oil prices: implications for sustainability

Despite the current volatility (early 2007), oil prices have experienced a persistently upward trend since 2004. By examining the cascading and stochastic models of herding, the paper looks at the role of herding and diminishing resources behind the volatility and rapid rise in oil prices. A main argument here is that the existence of institutional herding is not incompatible with the entry of noise traders; it rather leads and complements them. The paper also shows that persistent rise may in fact encourage sustainable alternative sources of energy to save the pernicious impact of herding, which can always rattle the prices dissuading the investors from investing in alternative energy. The methodology is based on literature review and the relevant data on oil prices.

The Price Impact of Institutional Herding

In this paper we develop a simple theoretical model to analyze the impact of institutional herding on asset prices. A growing empirical literature has come to the intriguing conclusion that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We offer a theoretical resolution to this dichotomy. In our model, career-concerned money managers interact with profit-motivated proprietary traders and security dealers endowed with market power. The reputational concerns of fund managers imply an endogenous tendency to imitate past trades, which impacts the prices of the assets they trade. We show that institutional herding positively predicts short-term returns but negatively predicts long-term returns. In addition, our paper generates several new testable predictions linking institutional herding behavior, trading volume, and the time-series properties of stock returns.

Systematic noise

We analyze trading records for 66,465 households at a large discount broker and 665,533 investors at a large retail broker to document that the trading of individuals is highly correlated and persistent. This systematic trading of individual investors is not primarily driven by passive reactions to institutional herding, by systematic changes in risk-aversion, or by taxes. Psychological biases likely contribute to the correlated trading of individuals. These biases lead investors to systematically buy stocks with strong recent performance, to refrain from selling stocks held for a loss, and to be net buyers of stocks with unusually high trading volume.

Institutional Herding and Information Cascades: Evidence from Daily Trades

Institutional Herding and Information Cascades: Evidence from Daily Trades