Exploring Style Herding by Mutual Funds

Abstract

This paper analyses mutual fund herding in the value-growth and size dimensions. We document that mutual fund herding in styles is significant and persistent. Furthermore, the results show that mutual fund herding tends to increase after periods of high cumulative returns and market volatility. Positive sentiment is followed by an increase in mutual fund herding towards small stocks. Instead, mutual fund herding in large value stocks significantly decreases after better-than-average economic conditions. The level of mutual fund herding is lower during crises. Mutual fund herding in styles causes overpricing in the market portfolio, and SMB and HML factors; this effect is stronger when the average fund flows are higher. Furthermore, mutual fund herding in styles in some cases impacts the autocorrelation structure of factor returns. Finally, we find that mutual fund herding in styles also affects the average fund flows and performance of the industry.

Keywords: herding, mutual funds, style investing, asset pricing

JEL Classification: C32, G12, G23