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What Drives the Herding Behavior of Individual Investors?Maxime MerliStrasbourg University, LaRGE Research Center, EM Strasbourg Business School Tristan RogerUniversity of Grenoble; French National Center for Scientific Research (CNRS) - European Financial Data Institute (EUROFIDAI); French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG) June 26, 2012 Abstract: We introduce a new measure of herding that allows for tracking dynamics of individual herding. Using a database of over 8 million trades by 87,373 retail investors between 1999 and 2006, we show in an original way that individual herding is persistent over time and that past performance and the level of sophistication influence this behavior. We are also able to answer a question that was previously unaddressed in the literature: is herding profitable for investors? We demonstrate, as a primary result, that the investors trading against the crowd tend to exhibit more extreme returns and poorer risk-adjusted performance than the herders.
Number of Pages in PDF File: 41 Keywords: Herding Behavior, Individual Investors, Sophistication, Performance working papers seriesDate posted: July 25, 2011 ; Last revised: June 26, 2012Suggested CitationContact Information
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