Information Contents of QFIIs' Cascades in the Taiwan Stock Market

Abstract

This study follows and extends Sias (2004) to examine whether Qualified Foreign Institutional Investors' (QFIIs') herding behavior exists in the Taiwan stock market. By testing the cross-sectional dependence in QFII's demand over two adjacent months and decomposing them into QFIIs' own cascades and other cascades, we demonstrate that QFIIs' herding still exists even if QFIIs' cascades mainly result from their own trades of securities with at least medium trading frequency, regardless of the raw fraction of numbers or shares on QFIIs buying. We find little evidence that QFIIs' herding is driven by habit investing in stocks which QFIIs trade with at least low-to-medium frequency. Momentum trading of QFIIs accounts for little of their herding behavior, and the obviously positive relation between QFIIs' demand and their lag demand changes little even with their momentum trading taken into consideration. Most importantly, QFIIs are more likely to herd in smaller capitalization securities; thus, informational cascades rather than investigative herding are the main reason for QFIIs' herding in the Taiwan stock market.

Keywords: informational cascades, herding, momentum trading, habit investing, QFIIs

JEL Classification: G14, G15, C31, C51