Escolar Documentos
Profissional Documentos
Cultura Documentos
Views on herding
According to Devenow & Welch (1996) there are two polar views on herding Rational herding: based on externalities and access to information or incentive issues may distort the optimal decision making of an investor. Irrational herding: based on investor psychology, where investors follow the actions of others blindly by simply ignoring rational analysis.
Types of herding
Two types of herding have been identified in literature: Herd towards particular stock and Herd towards the market.
Consequences of Herding
In financial markets herding behavior can distort the price of shares, other financial assets such as currencies, because they are traded above or below their true value. Herding by market participants exacerbates volatility, destabilizes markets, and increases the fragility of the financial system
This behavioral impact on stock prices tends to affect the risk and return characteristics of the stock and affect the asset pricing mechanism Portfolio diversification Herding exaggerate the fickle nature of stock markets
Empirical Evidence
The existence of herd behavior in speculative markets has been documented by a certain number of studies: Scharfstein and Stein (1990) discuss evidence of herding in the behavior of fund managers, Grinblatt et al. (1995) report herding in mutual fund behavior, and Trueman (1994) and Welch (1996) show evidence for herding in the forecasts made by financial analysts
Used by
Zwiebel (1995), Maug and Naik (1995) and Palley (1995), Stickel (1990, 1992, 1995), Olsen (1996), Cote and Sanders (1999), de Bondt and Forbes (1999), and Welch (1999). Cote and Goodstein (1999) Golec (1997)
Brennan (1990) and Froot et al. (1992). Hirshleifer et al. (1994), Calvo and Mendoza (1997) Bikhchandani et al. (1992) Banerjee (1992). Welch (1992)
Vives (1996), Neeman and Orosel (1999), Smith and Srensen (1997, 1999), Gul and Lundholm (1995), Gale (1996), Zhang (1997), Avery and Zemsky (1995), Hirshleifer and Welch (1998). Pingle (1995),
Behavioral models
Compensation-based herding.
BEHAVIORAL HERDING
Investor psychology, interpersonal communication, or contagion of interest are the sources of irrational decision-making. Interpersonal communication Investors did not seem to be systematic in their buying decisions and that both institutional and individual investors' initial interest in a stock was stimulated by other investors Mimetic contagion Imitation is more likely when a decision is made for the first time, a change in the decision-making environment occurs, and when the decision making environment is competitive or challenging Psychological factors Psychological factors are modeled as follows. Traders can either be optimistic or pessimistic. Suppose that there is a high proportion of optimistic traders. Because traders are non-sophisticated and susceptible to other traders' behavior, it is very likely that the remaining pessimistic traders change their attitudes and become optimistic as well. Herding is therefore characterized as contagion of sentiment.
Maug & Naik (1995) find that a risk averse investors compensation increases with her own performance and decreases in the performance of a benchmark, because the compensation of agent is an increasing function of the profit he earns and a decreasing function of benchmark profits, both the agent and benchmark investor make decisions on imperfect private information about stock returns. Therefore, agents portfolio choice decision is followed by the action of benchmark investor.
CSSDt
(R
i 1
i ,t
Rm,t )
N 1
Where, N is the number of firms in the portfolio, Ri t is the individual stock return of firm i at time t, Rm,t is the cross-sectional average stock of N returns in the portfolio at time t. This study test herding by estimating the following empirical design proposed by Christie & Huang (2005): U U L L
DtU Where, = 1, if the return on the aggregate market portfolio for the time period t lies in the extreme upper tail of the returns distribution, and 0 otherwise L D t . = 1, if the return on the aggregate market portfolio for time period t lies in the extreme lower tail of the returns distribution, and 0 otherwise
CSSDt 1 Dt 2 Dt t
The coefficient describe the average level of dispersion of the sample, include the area excluded by the dummy variables The dummy variables describe the difference in investor behavior during extreme market movements from the period of relatively normal market returns. The presence of negative and statistically significant 1 and 2 coefficients would indicate herd formation by market participants. Similarly significant positive coefficients 1 and 2 establish the prediction of rational asset pricing model. As per rational asset pricing model, the relationship between the absolute value of the market return and equity return dispersion is positive because investors obtain different information and have different expectations about the market
Results
For daily, weekly and monthly data regression results yield significantly positive coefficients for all coefficients, so these results supports the rational asset pricing models and absence of herding. The regression results for monthly data are significantly positive for 1% criteria, whereas insignificant for 5% criteria where data extreme values lies at 1% and 5% of the upper and lower tails of the distribution. It implies that affect of herding behavior average out in long run.
1 CSADt N
| R
i 1
i ,t
Rm ,t |
Where Rm,t is the average return of the equal-weighted market portfolio at time t, which represents the market return, and, Ri,t is the individual stock return of firm i at time t An alternative methodology was proposed by Chang et al. (2000) to identify herding. To examine the relationship between the absolute value of the market return and equity return dispersion, the following regression is used:
CSADt 1 Rm,t 2 R
2 m ,t
Herding behavior result in increase in correlation among asset returns, and likely to decrease dispersion among asset returns, or increasing at a decreasing rate with the market returns, so the relationship between aggregate market returns and individual securities become non linearly increasing or even decreasing (Chang et al, 2000)
The relationship among CSAD and Rm,t indicates the presence of herding, where Rm,t is the equally weighted average stock returns in the KSE listed portfolio,
where as Rm,t is included in the test equation to investigate the non linearity in market returns, presence of significantly negative coefficient 2 confirm the existence of herding behavior in equity markets.
2
Results
For daily data, the coefficient 1 , is significant and positive but the nonlinear term 2 is significant and negative confirming the presence of herding because market dispersion is increasing at decreasing rate.
Where, i,t is the time-invariant systematic risk measure of the security, i = 1, . . . ,N and t = 1, . . . ,T . Hmt is the measure of degree of herding, If Hmt = 0, then no herding and Hmt =1 means perfect herding.
Variables
stock returns, portfolio returns, CSSD index, Returns, CSAD, Dummy variables
Country
USA
Results
No evidence of herding
Chang et al (2000)
Stock
Herding identified in developing countries, south Korea and Taiwan but not in developed countries herding exists in extreme market conditions
Caparrelli, DArcangelis and Cassuto (2004) Gleason, Mathurb, and Peterson (2004) Demirer and Kutan (2005)
CSSD,CSAD, returns
stock
Italy
Analysis of intraday herding behavior among the sector ETFs Does herding behavior exist in Chinese stock markets? Do investors herd intraday in Australian equities? An Analysis of Cross-Country Herd Behavior in Stock Markets: A Regional Perspective
Stock
USA
stock
China
CSSD,CSAD, returns,
Australia Africa, Asia, Western Europe, Central and Eastern Europe, Latin America and the Middle East China
No herding intraday Herding in Asian and Middle Eastern stocks markets No herding in other regions
Herding behavior in Chinese stock markets: An examination of A and B shares Herding behavior in extreme market conditions: the case of the Athens stock exchange Herding Behaviour in the Chinese and Indian stock markets An examination of herd behavior Mediterranean stock markets in four
Tan, Chiang, Mason and Nelling (2008) Caporale, Economou, and Philippas (2008) Lao and Singh
Athens
Stock
returns, Trading volumes, CSSD, CSAD. CSAD, market returns, trading volume, and return volatility
Herding exist in both markets but more prevalent in China Evidence of herding in Portuguese stock market. No herding for the Spanish, Italian stock markets and Greek stock market.
CSSD,
Thank you