Herding in Trading by Amateur and Professional Investors

41 Pages Posted: 13 Mar 2009

See all articles by Itzhak Venezia

Itzhak Venezia

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Amrut J. Nashikkar

New York University (NYU) - Department of Finance

Zur Shapira

Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Management and Organizational Behavior

Date Written: March 12, 2009

Abstract

We study herding behavior of amateur and professional investors using a unique data-set consisting of all their daily transactions during a four-year period, and explore the factors that can explain such behavior and examine to what extent is herding information-driven. We distinguish between stock specific features such as systematic risk, idiosyncratic risk, and size, on the one hand, and market factors such as total stock market volume and returns on the other hand. We find herding a tendency among both types of investors and that this tendency is higher for amateurs. Herding is affected by both risk and size: it is a decreasing function of the size of the firm, and an increasing function of its risk. Idiosyncratic risk tends to positively affect herding but this effect is significantly lower for professionals. Systematic risk however positively influences only herding by professionals. Our data also reveal that herding behavior of the two groups is a persistent phenomenon, and that it is closely related to the volatility of market returns. In addition, amateurs' herding is weakly related to market returns. Most of the results are consistent in general with the theory that herding is information-based.

Keywords: Herding, professional investors, amateur investors, behavioral finance

JEL Classification: G0, G11, G14

Suggested Citation

Venezia, Itzhak and Nashikkar, Amrut J. and Shapira, Zur, Herding in Trading by Amateur and Professional Investors (March 12, 2009). Available at SSRN: https://ssrn.com/abstract=1358623 or http://dx.doi.org/10.2139/ssrn.1358623

Itzhak Venezia (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Amrut J. Nashikkar

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
+1-212-998-0718 (Phone)

HOME PAGE: http://pages.stern.nyu.edu/~anashikk

Zur Shapira

Leonard N. Stern School of Business - Department of Economics ( email )

40 West Fourth Street, 7-06
New York, NY 10012
United States

New York University (NYU) - Department of Management and Organizational Behavior ( email )

44 West 4th Street
New York, NY 10012
United States

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