Industry Herding and Momentum
Posted: 21 May 2019
Date Written: March 19, 2012
Theoretical models on herd behavior predict that under different assumptions, herding can bring prices away (or towards) fundamentals and reduce (or enhance) market efficiency. In this article, we study the joint effect of herding and momentum at the industry level. We find that the momentum effect is magnified when there is a low level of investor herding. Herd behavior in investors helps move asset prices towards fundamentals, enhance market efficiency and reduce the momentum effect. A trading strategy taking a long position in winner industries and a short position in loser industries when the herding level is low can generate significant returns.
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