Herding behaviour in strategic asset allocations: new approaches on quantitative and intertemporal imitation

Abstract

In this article, we contribute to financial literature on institutional herding behaviour, intertemporal imitation and informational cascades by analysing the changes in the strategic asset allocations of Spanish equity pension plans investing in Eurozone equities. This article is mainly focused on methodological improvements. Firstly, the study examines the herding phenomenon by using the traditional measure developed by Lakonishok, Shleifer and Vishny (LSV) (1992). Afterwards, some original analyses such as the consideration of a restricted definition of buying and selling and the amount of the variations in the strategic allocations are carried out to overcome certain shortcomings existing in this metric. Moreover, we analyse the intertemporal imitation and the informational cascades through time-series regressions. The results show that Spanish pension managers are involved in herd behaviour, a phenomenon that is reinforced when important movements of the strategic allocations are required. Intertemporal analyses confirm the convergent behaviour of a significant number of pension plans; while the study of informational cascades allows us to discriminate between those plans that present anticipatory abilities and those that follow the strategic movements of the rest of the managers.

Measuring mutual fund herding – A structural approach

“…2 Grinblatt, Titman, and Wermers (1995) and Wermers (1999) are key papers on the US mutual fund market which apply and adjust the traditional herding measure. Over time, the measure has been applied at the stock level in many countries (see for example Choe, Kho, and Stulz, 1999 for South Korea, Kyrolainen and Perttunen, 2003, for Finland, Voronkova and Bohl, 2005, for Poland, Wylie, 2005, for the UK, Lobao and Serra, 2006, for Portgugal, Walter and Weber, 2006, for Germany), to herding in investment styles (see Choi andSias, 2009, andAndreu, Ortiz, andSarto, 2009) and in other securities (see Oehler and Goeth-Chi Chao, 2002, on bond markets). All these studies find significant evidence of herding among investors.…”

“…Further drawbacks of the traditional herding measure mentioned in Bikhchandani and Sharma (2000) are the lack of an inter-temporal dimension of herding as well as the measure's use of a binary measure of buys versus sells, rather than the size of the transaction. Sias (2004), Choi and Sias (2009), Andreu et al (2009), and Gavriilidis, Kallinterakis, and Ferreira (2013) provide alternative approaches which focus on intertemporal aspects in fund managers' trading behavior. One way to account for different transaction sizes, would be to focus only on transactions of sufficient size (see Andreu et al, 2009, who also provide other means to also account for transaction size, as well as Hu, Meng, and Potter, 2008, in a slightly different context).…”

“…Sias (2004), Choi and Sias (2009), Andreu et al (2009), and Gavriilidis, Kallinterakis, and Ferreira (2013) provide alternative approaches which focus on intertemporal aspects in fund managers' trading behavior. One way to account for different transaction sizes, would be to focus only on transactions of sufficient size (see Andreu et al, 2009, who also provide other means to also account for transaction size, as well as Hu, Meng, and Potter, 2008, in a slightly different context). However, we show that the traditional herding measure's bias varies with the number of transactions used in the analysis, and different filtering rules would thus distort the measure differently.…”

Do Institutional Investors Herd in Emerging Markets? Evidence from the Taiwan Stock Market

“…Since institutional investors are equipped with sufficient information and specialized knowledge, they should be able to make independent and rational investment decisions to generate a reasonable profit (Grinblatt and Keloharju, 2000;Goodfellow et al, 2009). However, some empirical studies indicate that institutional investors often follow other institutional investors to engage in herding, that is, in buying or selling the same stocks over a period of time (Grinblatt et al, 1995;Nofsinger and Sias, 1999;Wermers, 1999;Wylie, 2005;Walter and Weber, 2006;Agudo et al, 2008;Andreu et al, 2009). Moreover, such a phenomenon is particularly apparent in emerging markets (Lobao and Serra, 2002;Voronkova and Bohl, 2005;Tan et al, 2008).…”

Herding in Style Allocations

“…As a consequence, Andreu et al (2009) propose a time-series analysis to test intertemporal herding patterns. These authors compare the variations in the investments of each pension plan to those carried out by the rest of managers.…”