Herd Behaviour & Investor Sentiment: Evidence from UK Mutual Funds

Abstract

The aims of this paper are to detect evidence of institutional investor herding behaviour and examine the role that investor sentiment plays in the institutional investor herd behaviour. We use bivariate GARCH method estimated time varying beta to estimate herding variables of UK open-ended and closed-end funds. A state space model used in the process the study finds evidence of fund manager herding behaviour, which suggests they are likely to herd on market portfolio. UK market-wide sentiment index and UK institutional sentiment index are used for investigating the effects of investor sentiment on institutional herding behaviour. We found that market-wide sentiment may be a source of both open-ended and closed-end fund managers’ herding behaviour. Institutional sentiment may be a source of open-ended fund managers’ herding. A bi-directional causality relation between institutional sentiment and closed-end fund herding is also found from investigations.

Keywords: institutional investors, herding, mutual fund, investor sentiment

JEL Classification: G02, G11, G12, G23