Herding Behaviour in Investment Decision Making: A Review
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Published
Jun 27, 2019
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1-12
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Palak Dewan
School of Business Studies, Punjab Agricultural University, Ludhiana, Punjab, 141027, India.
Khushdeep Dharni
School of Business Studies, Punjab Agricultural University, Ludhiana, Punjab, 141027, India.
Abstract
Herding denotes how individuals act together in a group without any centralized direction. Herding is widely studied as it drives asset prices away from the fundamental value and there are concerns it leads to volatility, destabilizes the market and increases the fragility of the financial market. In this paper, a concise review of the literature of herding is provided. Various types of herding, its significance and occurrences along with the determinants are discussed. Various approaches used for measuring herding have been reviewed. The relationship of herding along with other variables such as market conditions, volatility, and liquidity is reviewed and studied. For the purpose of drafting the review paper, 79 papers for over three decades have been consulted. Further, future research directions are included for the benefit of the academicians, researchers and policymakers.
Keywords:
Herding behaviour, financial market, volatility, liquidity, behavioural biases
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References
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Kahneman D. Thinking, fast and slow. New York Farrar: Straus and Giroux; 2011.
Scharfstein DS, Stein JC. Herd behavior and investment. American Econ Rev. 1990;80(3):465-479.
Nofsinger JR, Sias RW. Herding and feedback trading by institutional and individual investors. J Fin. 1999;54(6): 2263-2295.
Bikhchandani S, Sharma S. Herd behavior in financial markets: A review. IMF Working Paper00/48, International Monetary Fund; 2000. (In press).
Tan L, Chiang TC, Mason JR, Nelling E. Herding behavior in Chinese stock markets: An examination of a and b shares. Pacific-Basin Fin J. 2008;16(1-2): 61–77.
Denovow A, Welch I. Rational herding in financial economics. European Econ Rev. 1996;40:603-615.
Banerjee A. A simple model of herd behaviour. Quarterly. J Econ. 1992;107(3): 797-817.
Bikhchandani S, Hirshleifer D, Welch I. A theory of fads, fashions, custom, and cultural change as informational cascades. J Political Economy. 1992;100(5):992-1026.
Trueman B. Analyst forecasts and herding behavior. Rev Fin Studies. 1994;7(1):97-124.
Lakshman MV, Basu S, Vaidyanathan R. Market-wide herding and the impact of institutional investors in the Indian capital market. J Emer Mkt Fin. 2013;12(2):197-237.
Zhou J, Anderson RI. An empirical investigation of herding behavior in the U.S. REIT market. J Real Estate Fin Eco. 2013;47(1):83-108.
Lao P, Singh H. Herding behaviour in the Chinese and Indian stock markets. J Asian Econ. 2011;22(6):495-506.
Chang EC, Cheng JW, Khorana A. An examination of herd behavior in equity markets: An international perspective. J Bank Fin. 2000;24:1651-1679.
Available:https://doi.org/10.1016/S0378-4266(99)00096-5
Chiang TC, Zheng D. An empirical analysis of herd behavior in global stock markets. J Bank Fin. 2010;34(8):1911-1921.
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Ramadan IZ. Cross-sectional absolute deviation approach for testing the herd behavior theory: The case of the ASE index. International Journal of Economics and Finance, 2015;7(3):188-193.
Available:http://dx.doi.org/10.5539/ijef.v7n3p188
Prosad JM, Kapoor S, Sengupta J. Behavioral biases of Indian investors: A survey of Delhi-NCR region. Qualitative Res Fin Mks. 2014;7(3):230-263.
Available:https://doi.org/10.1108/QRFM-04-2014-0012
Poshakwale S, Mandal A. Investor behaviour and herding: Evidence from the national stock exchange in India. J Emer Mkt Fin. 2014;13(2):197-216.
Available:https://doi.org/10.1177%2F0972652714541341
Garg A, Jindal K. Herding behavior in an emerging stock market: empirical evidence from India. J Applied Fin. 2014;20(2):18-36.
Sias RW. Institutional herding. Rev Financial Studies. 2014.17(1):165-20.
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Chen YF, Yang SY, Lin FL. Foreign institutional industrial herding in Taiwan stock market. Managerial Fin. 2012;38(3): 325-340. Available:https://doi.org/10.1108/03074351211201442
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[Accessed 1st January 2019]
Available:http://dx.doi.org/10.2139/ssrn.1572726
Dasgupta A, Prat A, Verardo M. The price impact of institutional herding. Rev Fin Studies. 2010;24:892-925.
Available:https://www.jstor.org/stable/20869257
Duffie D. Presidential address: Asset price dynamics with slow moving capital. J Fin. 2010;65(4):1237-1267.
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Puckett A, Yan XS. Short-term institutional herding and its impact on stock prices; 2008.
[Accessed 4th January 2019]
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Goldstein I, Jiang H, Ng DT. Investor flows and fragility in corporate bond funds. J Financial Econ. 2017;126(3):592-613.
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Grinblatt M, Titman S, Wermers R. Momentum investment strategies, portfolio performance and herding: A study of mutual fund behaviour. American Econ Rev. 1995;85(5):1088-1105.
Wermers R. Mutual fund herding and the impact on stock prices. J Fin. 1999;54(2): 581-622.
Available:https://doi.org/10.1111/0022-1082.00118
Clarke J, Ornthanalai C, Tang Y. Informa-tional herding by institutional investors: evidence from analyst recommendations. SSRN Electronic J; 2010.
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Available:http://dx.doi.org/10.2139/ssrn.1707868
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Available:https://doi.org/10.1016/j.jfineco.2018.07.012 (In press)
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Kyrolainen PJ, Perttunen J. Investors activity and trading behavior. Paper presented in EFMA Helinski Meetings; 2003.
Fong K, Gallagher DR, Gardner P, Swan PL. A closer examination of investment manager herding behavior. Unpublished Manuscript, Sydney; 2004.
Chang EC, Dong S. Idiosyncratic volatility, fundamentals, and institutional herding: evidence from the Japanese stock market. Pacific-Basin Fin J. 2005;14(2): 135-154.
Available:https://dx.doi.org/10.2139/ssrn.665302
Wylie S. Fund manager herding: A test of the accuracy of empirical results using U.K. data. J Bus. 2005;78(1):381-403.
Available:http://dx.doi.org/10.1086/426529
Sharma V, Easterwood JC, Kumar R. Institutional herding and the internet bubble. Working Paper, SSRN Electronic J; 2006.
Walter A, Weber FM. Herding in the German mutual fund industry. European Financial Mgt. 2006;12(3):375-406.
Available:https://doi.org/10.1111/j.1354-7798.2006.00325.x
Manganaro A, Martens DV. Herding behaviour in the Swedish mutual fund industry. Ph. D. Thesis; Stockholm School of Economics; 2007.
Agudo LF, Sarto JL, Vicente L. Herding behavior in Spanish equity funds. Applied Econ Letters. 2008;15(7):573-576.
Available:https://doi.org/10.1080/13504850600706974.
Theriou N, Mlekanis G, Maditinos D. Herding by mutual fund managers in the Athens stock exchange. European Res Studies J. 2012;14(4):131-154.
Patro A. Exploring the herding behaviour in Indian mutual fund industry. Asian J Fin Acct. 2012;4(1):189-204.
DOI: 10.5296/ajfa.v4i1.1478
Koch A. Herd behavior and mutual fund performance. Mgt Sci. 2012;63(11):3849-3873. Available:https://dx.doi.org/10.2139/ssrn.2399181
Bhattacharya D, Sonaer G. Herding by mutual funds: Impact on performance and investors’ response. The European J Fin. 2018;24(4):283-299. Available:https://www.tandfonline.com/doi/figure/10.1080/1351847X.2016.1224194?scroll=top&needAccess=true
Popescu M, Xu Z. Mutual fund herding and reputational concerns. J Econ Fin. 2018; 42(3):550-565. Available:http://dx.doi.org/10.1007/s12197-017-9405-y
Lakonishok J, Shleifer A, Vishny RW. The impact of institutional trading on stock prices. J Fin Econ. 1992;32(1):23-44.
Available:https://doi.org/10.1016/0304-405X(92)90023-Q
Christie WG, Huang RD. Following the pied piper: Do individual returns herd around the market? Financial Analysts J. 1995;51(4):31-37.
Available:https://doi.org/10.2469/faj.v51.n4.1918
Hwang S, Salmon M. Market stress and herding. J Empirical Fin. 2004;11(4):585-616. Available:https://doi.org/10.1016/j.jempfin.2004.04.003
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Available:http://web.econ.ku.dk/fru/conference/Programme/Saturday/E1/Salmon_herding21r_256.pdf
Fernandez B, Merino TG, Mayoral R, Santos V, Vallelado E. Herding, informa-tion uncertainty and investors’ cognitive profile. Qualitative Res Financial Mkt. 2011;3(1):7-33. Available:https://doi.org/10.1108/17554171111124595
Rekik YM, Boujelbene Y. Determinants of individual investors’ behaviors: Evidence from Tunisian stock market. IOSR J Bus Mgt. 2013;8(2):109-119.
Available:http://dx.doi.org/10.9790/487X-082109119
Ngoc LTB. Behavior pattern of individual investors in stock market. Int J Bus Mgt. 2014;9(1):1-16. Available:https://doi.org/10.5539/ijbm.v9n1p1
Ghalandari K, Ghahremanpour J. The effect of market variables and herding effect on investment decision as factor influencing investment performance in Iran. J Basic Appl Sci Res. 2013;3(3):313-318.
Jhandir SU, Elahi MA. Behavioral biases in investment decision making and moderating role of investor’s type. Paper presented in SZABIST's 20th National Research Conference; 2014.
Gupta Y, Ahmed S. The impact of psycho-logical factors on investment decision making of investors: an empirical analysis. EPRA Int J Econ Bus Rev. 2016;4(11):40-52.
Gleason KC, Lee CI, Mathur I. Herding behavior in European futures markets. Fin Letters. 2003;1:5-8.
DOI: 10.1.1.200.1383
Ouarda M, Bouri AL, Bernard O. Herding behavior under markets condition: Empirical evidence on the European financial markets. Int J of Econ Financial Issues. 2013;3(1):214-228.
Mobarek A, Mollah S, Keaseyb K. A cross-country analysis of herd behavior in Europe. J of Int Financial Mkts Institutions Money. 2014;32:107-127.
Available:https://doi.org/10.1016/j.intfin.2014.05.008
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Caporale GM, Economou F, Philippas N. Herding behaviour in extreme market conditions: The case of the Athens stock exchange. Economics Bulletin. 2008;7(17): 1-13.
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DOI: 10.5539/ijbm.v7n7p121
Cakan E, Balagyozyan A. Sectoral herding: Evidence from an emerging market. J Acct Fin. 2016;16(4):1-12.
Available:http://digitalcommons.newhaven.edu/economics-facpubs?
Ripoldi F. The “herding effect”: Evidence from Chinese stock markets. Ph. D. Thesis, University of Padova; 2016.
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DOI: 10.1016/j.irfa.2015.02.006
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Scharfstein DS, Stein JC. Herd behavior and investment. American Econ Rev. 1990;80(3):465-479.
Nofsinger JR, Sias RW. Herding and feedback trading by institutional and individual investors. J Fin. 1999;54(6): 2263-2295.
Bikhchandani S, Sharma S. Herd behavior in financial markets: A review. IMF Working Paper00/48, International Monetary Fund; 2000. (In press).
Tan L, Chiang TC, Mason JR, Nelling E. Herding behavior in Chinese stock markets: An examination of a and b shares. Pacific-Basin Fin J. 2008;16(1-2): 61–77.
Denovow A, Welch I. Rational herding in financial economics. European Econ Rev. 1996;40:603-615.
Banerjee A. A simple model of herd behaviour. Quarterly. J Econ. 1992;107(3): 797-817.
Bikhchandani S, Hirshleifer D, Welch I. A theory of fads, fashions, custom, and cultural change as informational cascades. J Political Economy. 1992;100(5):992-1026.
Trueman B. Analyst forecasts and herding behavior. Rev Fin Studies. 1994;7(1):97-124.
Lakshman MV, Basu S, Vaidyanathan R. Market-wide herding and the impact of institutional investors in the Indian capital market. J Emer Mkt Fin. 2013;12(2):197-237.
Zhou J, Anderson RI. An empirical investigation of herding behavior in the U.S. REIT market. J Real Estate Fin Eco. 2013;47(1):83-108.
Lao P, Singh H. Herding behaviour in the Chinese and Indian stock markets. J Asian Econ. 2011;22(6):495-506.
Chang EC, Cheng JW, Khorana A. An examination of herd behavior in equity markets: An international perspective. J Bank Fin. 2000;24:1651-1679.
Available:https://doi.org/10.1016/S0378-4266(99)00096-5
Chiang TC, Zheng D. An empirical analysis of herd behavior in global stock markets. J Bank Fin. 2010;34(8):1911-1921.
Available:https://doi.org/10.1016/j.jbankfin.2009.12.014
Lindhe E. Herd behavior in stock markets a Nordic study; 2012.
[Accessed 3rd January 2019]
Available:http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=3046944&fileOId=3046946
Ramadan IZ. Cross-sectional absolute deviation approach for testing the herd behavior theory: The case of the ASE index. International Journal of Economics and Finance, 2015;7(3):188-193.
Available:http://dx.doi.org/10.5539/ijef.v7n3p188
Prosad JM, Kapoor S, Sengupta J. Behavioral biases of Indian investors: A survey of Delhi-NCR region. Qualitative Res Fin Mks. 2014;7(3):230-263.
Available:https://doi.org/10.1108/QRFM-04-2014-0012
Poshakwale S, Mandal A. Investor behaviour and herding: Evidence from the national stock exchange in India. J Emer Mkt Fin. 2014;13(2):197-216.
Available:https://doi.org/10.1177%2F0972652714541341
Garg A, Jindal K. Herding behavior in an emerging stock market: empirical evidence from India. J Applied Fin. 2014;20(2):18-36.
Sias RW. Institutional herding. Rev Financial Studies. 2014.17(1):165-20.
Available:http://dx.doi.org/10.1093/rfs/hhg0356.
Gutierrez RC, Kelley EK. Institutional herding and future stock returns; 2009.
[Accessed 1st January 2019]
Available:https://ssrn.com/abstract=1107523
Brown NC, Wei KD, Wermers R. Analyst recommendations, mutual fund herding and overreaction in stock prices. Mgt Sci. 2012;60(1):1-20. Available:https://doi.org/10.1287/mnsc.2013.1751
Chen YF, Yang SY, Lin FL. Foreign institutional industrial herding in Taiwan stock market. Managerial Fin. 2012;38(3): 325-340. Available:https://doi.org/10.1108/03074351211201442
Christoffersen S, Tang Y. Institutional herding and information cascades: Evidence from daily trades. SSRN Electronic J; 2010.
[Accessed 1st January 2019]
Available:http://dx.doi.org/10.2139/ssrn.1572726
Dasgupta A, Prat A, Verardo M. The price impact of institutional herding. Rev Fin Studies. 2010;24:892-925.
Available:https://www.jstor.org/stable/20869257
Duffie D. Presidential address: Asset price dynamics with slow moving capital. J Fin. 2010;65(4):1237-1267.
Available:https://doi.org/10.1111/j.1540-6261.2010.01569
Puckett A, Yan XS. Short-term institutional herding and its impact on stock prices; 2008.
[Accessed 4th January 2019]
Available:http://ssrn.com/abstract=972254
Goldstein I, Jiang H, Ng DT. Investor flows and fragility in corporate bond funds. J Financial Econ. 2017;126(3):592-613.
Available:https://doi.org/10.1016/j.jfineco.2016.11.007
Grinblatt M, Titman S, Wermers R. Momentum investment strategies, portfolio performance and herding: A study of mutual fund behaviour. American Econ Rev. 1995;85(5):1088-1105.
Wermers R. Mutual fund herding and the impact on stock prices. J Fin. 1999;54(2): 581-622.
Available:https://doi.org/10.1111/0022-1082.00118
Clarke J, Ornthanalai C, Tang Y. Informa-tional herding by institutional investors: evidence from analyst recommendations. SSRN Electronic J; 2010.
[Accessed 1st January 2019]
Available:http://dx.doi.org/10.2139/ssrn.1707868
Cai F, Han S, Li D, Li Y. Institutional herding and its price impact: Evidence from the corporate bond market. Finance and Economics Discussion Series 091, Board of Governors of the Federal Reserve System, Washington, US; 2016.
Available:https://doi.org/10.1016/j.jfineco.2018.07.012 (In press)
Donghui S. Micro-behaviors of stock markets in China: Theory and practice. Shanghai Press of Far East; 2001.
Lobao J, Serra AP. Herding behavior– Evidence from portuguese mutual funds. In: Kyrolainen PJ, Perttunen J. Investors activity and trading behavior. Paper presented in EFMA Helinski Meetings; 2003. Available:https://dx.doi.org/10.2139/ssrn.302685
Kyrolainen PJ, Perttunen J. Investors activity and trading behavior. Paper presented in EFMA Helinski Meetings; 2003.
Fong K, Gallagher DR, Gardner P, Swan PL. A closer examination of investment manager herding behavior. Unpublished Manuscript, Sydney; 2004.
Chang EC, Dong S. Idiosyncratic volatility, fundamentals, and institutional herding: evidence from the Japanese stock market. Pacific-Basin Fin J. 2005;14(2): 135-154.
Available:https://dx.doi.org/10.2139/ssrn.665302
Wylie S. Fund manager herding: A test of the accuracy of empirical results using U.K. data. J Bus. 2005;78(1):381-403.
Available:http://dx.doi.org/10.1086/426529
Sharma V, Easterwood JC, Kumar R. Institutional herding and the internet bubble. Working Paper, SSRN Electronic J; 2006.
Walter A, Weber FM. Herding in the German mutual fund industry. European Financial Mgt. 2006;12(3):375-406.
Available:https://doi.org/10.1111/j.1354-7798.2006.00325.x
Manganaro A, Martens DV. Herding behaviour in the Swedish mutual fund industry. Ph. D. Thesis; Stockholm School of Economics; 2007.
Agudo LF, Sarto JL, Vicente L. Herding behavior in Spanish equity funds. Applied Econ Letters. 2008;15(7):573-576.
Available:https://doi.org/10.1080/13504850600706974.
Theriou N, Mlekanis G, Maditinos D. Herding by mutual fund managers in the Athens stock exchange. European Res Studies J. 2012;14(4):131-154.
Patro A. Exploring the herding behaviour in Indian mutual fund industry. Asian J Fin Acct. 2012;4(1):189-204.
DOI: 10.5296/ajfa.v4i1.1478
Koch A. Herd behavior and mutual fund performance. Mgt Sci. 2012;63(11):3849-3873. Available:https://dx.doi.org/10.2139/ssrn.2399181
Bhattacharya D, Sonaer G. Herding by mutual funds: Impact on performance and investors’ response. The European J Fin. 2018;24(4):283-299. Available:https://www.tandfonline.com/doi/figure/10.1080/1351847X.2016.1224194?scroll=top&needAccess=true
Popescu M, Xu Z. Mutual fund herding and reputational concerns. J Econ Fin. 2018; 42(3):550-565. Available:http://dx.doi.org/10.1007/s12197-017-9405-y
Lakonishok J, Shleifer A, Vishny RW. The impact of institutional trading on stock prices. J Fin Econ. 1992;32(1):23-44.
Available:https://doi.org/10.1016/0304-405X(92)90023-Q
Christie WG, Huang RD. Following the pied piper: Do individual returns herd around the market? Financial Analysts J. 1995;51(4):31-37.
Available:https://doi.org/10.2469/faj.v51.n4.1918
Hwang S, Salmon M. Market stress and herding. J Empirical Fin. 2004;11(4):585-616. Available:https://doi.org/10.1016/j.jempfin.2004.04.003
Hwang S, Salmon M. Measuring sentiment and herding in financial markets; 2005.
[Accessed 3rd Janualry 2019]
Available:http://web.econ.ku.dk/fru/conference/Programme/Saturday/E1/Salmon_herding21r_256.pdf
Fernandez B, Merino TG, Mayoral R, Santos V, Vallelado E. Herding, informa-tion uncertainty and investors’ cognitive profile. Qualitative Res Financial Mkt. 2011;3(1):7-33. Available:https://doi.org/10.1108/17554171111124595
Rekik YM, Boujelbene Y. Determinants of individual investors’ behaviors: Evidence from Tunisian stock market. IOSR J Bus Mgt. 2013;8(2):109-119.
Available:http://dx.doi.org/10.9790/487X-082109119
Ngoc LTB. Behavior pattern of individual investors in stock market. Int J Bus Mgt. 2014;9(1):1-16. Available:https://doi.org/10.5539/ijbm.v9n1p1
Ghalandari K, Ghahremanpour J. The effect of market variables and herding effect on investment decision as factor influencing investment performance in Iran. J Basic Appl Sci Res. 2013;3(3):313-318.
Jhandir SU, Elahi MA. Behavioral biases in investment decision making and moderating role of investor’s type. Paper presented in SZABIST's 20th National Research Conference; 2014.
Gupta Y, Ahmed S. The impact of psycho-logical factors on investment decision making of investors: an empirical analysis. EPRA Int J Econ Bus Rev. 2016;4(11):40-52.
Gleason KC, Lee CI, Mathur I. Herding behavior in European futures markets. Fin Letters. 2003;1:5-8.
DOI: 10.1.1.200.1383
Ouarda M, Bouri AL, Bernard O. Herding behavior under markets condition: Empirical evidence on the European financial markets. Int J of Econ Financial Issues. 2013;3(1):214-228.
Mobarek A, Mollah S, Keaseyb K. A cross-country analysis of herd behavior in Europe. J of Int Financial Mkts Institutions Money. 2014;32:107-127.
Available:https://doi.org/10.1016/j.intfin.2014.05.008
Blasco N, Corredor P, Ferreruela S. Can agents sensitive to cultural, organizational and environmental issues avoid herding. Fin Research Letters. 2017;22:114- 121. Available:https://doi.org/10.1016/j.frl.2017.01.006
Caporale GM, Economou F, Philippas N. Herding behaviour in extreme market conditions: The case of the Athens stock exchange. Economics Bulletin. 2008;7(17): 1-13.
Shboul MA. Asymmetric effects and the herd behavior in the Australian equity market. Int J Bus Mgt. 2012;7(7):121- 140.
DOI: 10.5539/ijbm.v7n7p121
Cakan E, Balagyozyan A. Sectoral herding: Evidence from an emerging market. J Acct Fin. 2016;16(4):1-12.
Available:http://digitalcommons.newhaven.edu/economics-facpubs?
Ripoldi F. The “herding effect”: Evidence from Chinese stock markets. Ph. D. Thesis, University of Padova; 2016.
Fu TW, Lin ML, Huang YJ. Time-varying herding relationship between spot equity market and futures market in Taiwan. Elixir Fin. 2012;43:6684-6693.
DOI: 10.1016/j.irfa.2015.02.006
Kahneman D, Tversky A. Prospect theory: An analysis of decision under risk. Econometrica. 1979;47(2):263-291.
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