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What Drives the Herding Behavior of Individual Investors?

Finance, 34(3), 2013

41 Pages Posted: 25 Jul 2011 Last revised: 20 Oct 2017

Maxime Merli

Strasbourg University, LaRGE Research Center, EM Strasbourg Business School

Tristan Roger

Université Paris-Dauphine, PSL Research University

Date Written: December 1, 2013

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.

Keywords: Herding Behavior, Individual Investors, Sophistication, Performance

Suggested Citation

Merli, Maxime and Roger, Tristan, What Drives the Herding Behavior of Individual Investors? (December 1, 2013). Finance, 34(3), 2013. Available at SSRN: https://ssrn.com/abstract=1895026 or http://dx.doi.org/10.2139/ssrn.1895026

Maxime Merli

Strasbourg University, LaRGE Research Center, EM Strasbourg Business School ( email )

PEGE
61 avenue de la Forêt Noire
Strasbourg, 67000
France

Tristan Roger (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

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