Herding, Trade Reversals, and Cascading by Institutional Investors
Posted: 20 Dec 1998
Date Written: September 1994
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: Suggested Citation