Herding, Trade Reversals, and Cascading by Institutional Investors
Author | : Russ Wermers |
Publisher | : |
Total Pages | : |
Release | : 2011 |
Genre | : |
ISBN | : |
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We analyze the portfolio holdings of mutual funds over the 1975-84 period to detect whether the funds engaged in quot;herdingquot; (simultaneous same-direction trading by a group of funds), quot;cascadingquot; (sequential same-direction trading by two groups of funds--one following the other), or quot;trade reversalsquot; (sequential opposite-direction trading by a single group of funds). Our results suggest the presence of herding behavior and short-term trade reversals, especially among the top performing funds; the funds especially exhibited herding behavior in stocks with high past returns. In addition, stocks that the funds bought as a herd had significantly higher abnormal returns, during the following quarters, than stocks that the funds sold as a herd. Finally, we find evidence of some groups of funds cascading their portfolio choices on the prior portfolio choices of other funds, in stocks with a large number of the 274 funds involved in trading.