Herding, Trade Reversals, and Cascading by Institutional Investors

Posted: 20 Dec 1998

See all articles by Russ Wermers

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Date Written: September 1994

Abstract

We analyze the portfolio holdings of mutual funds over the 1975-84 period to detect whether the funds engaged in "herding" (simultaneous same-direction trading by a group of funds), "cascading" (sequential same-direction trading by two groups of funds---one following the other), or "trade reversals" (sequential opposite-direction trading by a single group of funds). Our results suggest the presence of herding behavior and short-term trade reversals, especially among the top performing funds; the funds especially exhibited herding behavior in stocks with high past returns. In addition, stocks that the funds bought as a herd had significantly higher abnormal returns, during the following quarters, than stocks that the funds sold as a herd. Finally, we find evidence of some groups of funds cascading their portfolio choices on the prior portfolio choices of other funds, in stocks with a large number of the 274 funds involved in trading.

JEL Classification: G11, G20, G23

Suggested Citation

Wermers, Russell R., Herding, Trade Reversals, and Cascading by Institutional Investors (September 1994 ). Available at SSRN: https://ssrn.com/abstract=5644

Russell R. Wermers (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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