Evidence of herding and positive feedback trading for mutual funds in emerging Asian countries

Abstract

When analysing the behavior of investors, the emphasis is usually on positive feedback and herding behavior, and the existing literature abounds with studies on the domestic strategy of mutual funds or on their impact. Due to the advantages in terms of the data, many studies investigate US data. However, with the increased flows of capital into emerging markets, studying the behavior of international mutual funds in emerging markets has become more and more important. Nevertheless, studies involving emerging markets are relatively rare. This study examines whether the positive feedback effect and herding behavior exist in Asian markets based on mutual fund data covering the period from 1996 to 2004. The long period enables us to test the sensitivities under the following four conditions, namely the capital volatility (volatile vs. stable), the degree of suffering during the Asian crisis (more suffering vs. less suffering), and the timing of the Asian crisis (pre-, during, and post-crisis), using the exchange rate regime. It was found in this study that mutual fund inflows into the Asian market were attracted by positive stock returns and currency appreciation. Furthermore, it was found that the positive feedback effect and herding behavior did exist in the Asian markets. However, the extent of the above behavior is not the same under different conditions.Herding, Financial crisis, Mutual fund, Positive feedback effect, Behavioral effect,

Mutual funds flows and the geography of contagion

“…5 Although (global) push factors seem to initiate global waves of portfolio investments, structural "pull" factors (such as political stability or distance) determine the direction and magnitude of these flows. This finding is well connected to other empirical contributions that have emphasized the importance of mature market conditions -such as interest rates, liquidity, risk levels or weak economic performance -in 4 This includes overreaction (Kaminsky et al (2004), Borensztein and Gelos (2003)), momentum trading (Grinblatt et al (1995), Froot et al (2001)), herding (Wermers (1999), Choe et al (1999), Kim and Wei (2002), Hsieh et al (2011)), fire sales (Coval and Stafford (2007), Jotikasthira et al (2012)) or "contagious" portfolio rebalancing (Broner et al (2006), Jotikasthira et al (2012), Raddatz and Schmukler (2012)). 5 For early contributions on this debate see Calvo et al (1993), Calvo et al (1993), Chuhan et al (1998), FernandezArias (1996, Kim (2000), Griffin et al (2004).…”

Cyclical behavior of international fund flows

“…As to the first topic, several studies provide evidence for positive feedback trading, which indicates that fund flows are positively related to contemporaneous and past fund returns (Patro, 2006;Hsieh et al, 2011;Jinjarak et al, 2011;Gelos, 2012), and herding behavior (Wermers, 1999;Borensztein and Gelos, 2003;Jeon and Moffett, 2010).…”

“…Model 1 reads as follows: Borensztein and Gelos, 2003;Chhaochharia and Laeven, 2009;Hsieh et al, 2011;Fratzscher, 2012;Jotikasthira et al, 2012;Raddatz and Schmukler, 2012;Puy, 2015). Subscripts i and t denote country i and time t, respectively.…”

Dynamic interactions between real exchange rate and international fund flows in China

“…As to the research on international fund flows, three topics have been examined: (i) the behavior of international fund investments (Gelos, 2012;Hsieh et al, 2011;Jinjarak et al, 2011;Patro, 2006), (ii) the role of these investments in the transmission of financial shocks between countries (Gelos, 2012), and (iii) the drivers of international portfolio flows (Fratzscher, 2012;Puy, 2016). However, the interaction between exchange rates and international fund flows has never been investigated.…”