Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance

90 Pages Posted: 12 Apr 2013 Last revised: 12 Dec 2017

See all articles by Hao Jiang

Hao Jiang

Michigan State University

Michela Verardo

London School of Economics & Political Science (LSE)

Date Written: December 1, 2017

Abstract

We uncover a negative relation between herding behavior and skill in the mutual fund industry. Our new, dynamic measure of fund-level herding captures the tendency of fund managers to follow the trades of the institutional crowd. We find that herding funds underperform their antiherding peers by over 2% per year. Differences in skill drive this performance gap: antiherding funds make superior investment decisions even on stocks not heavily traded by institutions, and can anticipate the trades of the crowd; furthermore, the herding-antiherding performance gap is persistent, wider when skill is more valuable, and larger among managers with stronger career concerns.

Keywords: Mutual funds, performance, herding, imitation, alpha

JEL Classification: G11, G20, G23

Suggested Citation

Jiang, Hao and Verardo, Michela, Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=2248671 or http://dx.doi.org/10.2139/ssrn.2248671

Hao Jiang

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

Michela Verardo (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/verardom/

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