Herding in the mutual fund industry: evidence from Chile

Abstract

Purpose The purpose of this paper is to identify elements of intentional herd behavior (HB), differentiating it from spurious, or unintentional HB. Design/methodology/approach Using a panel of 50 stocks belonging to 18 Chilean equity mutual funds between December 2002 and October 2009, with manually collected data regarding physical positions of monthly purchases and sales, the authors calculate the level of HB and, by applying panel regressions with fixed and random effects, analyze the factors that determine this behavior, classifying them as agency, information, efficiency and behavioral problems. Findings The research establishes that among Chilean equity mutual funds, there is a herding of 2.8 percent, implying that for 100 funds trading a certain stock, 53 go in the same direction and 47 in another. This effect increases during widespread market dips and when stocks become fashionable, attracting market attention. This behavior is not merely spurious, associated with variables that predict returns, but also has an intentional component, related to agency problems and information, and a behavioral component, related to investors’ biases and beliefs. Originality/value The paper is original because, despite existing evidence of herding in international markets, it has been little quantified or studied in emerging markets. In addition, the literature does not distinguish between spurious and intentional HB, nor does it test different hypotheses jointly to explain the phenomenon.

Civil unrest and herding behavior: evidence in an emerging market

“…These three sectors contain 50% of the sample companies and 55% of the volumes traded during 2019. Considering that herding behavior has been reported in the services sector, specifically in the Pension Fund Administrators (Bravo & Ruiz, 2015;Raddatz & Schmukler, 2013), and in the Financial sector (Lavin & Magner, 2014), specifically in the Mutual Funds industry, there is likely to be herding behavior in the Chilean stock market.…”

Modeling Overlapped Mutual Funds’ Portfolios: A Bipartite Network Approach

“…This implies that, in months where the industry increases the liquidity of its mutual funds, they tend to do so by choosing similar stocks (the most liquid), whereas in periods where the industry uses lower liquidity levels, they tend to spread their investments across a larger number of stocks. This aggregate behavior is related to the herding phenomenon that mutual funds exhibit [37,39], a situation where they buy and they sell the same stocks.…”

“…To our best understanding, the channel evidenced in this study has not yet been linked to the herd behavior literature, despite having similarities. For example, the level of herd behavior among mutual funds increases during high periods of volatility and price downturns [39], precisely when financial shocks disturb the markets. An alternative to study the problem of herding could consider a more detailed analysis of the assortativity of the bipartite network of funds and stocks when considering higher order assortativity measures that could describe new topological characteristics of the network [49].…”

Intuition and mood of investors in financial markets

“…Lorenzo (2008) notes that, during the 2008 crisis, stock price fluctuations exceeded 20 per cent in a few days because of investors’ pressure and herd behaviour. Lavin and Magner (2014) evaluated the Chilean fund industry, and claimed that this behaviour stems from several factors, such as investment return, information and agency problems, and investors’ beliefs and biases. In short, a combination of intentional and unintentional factors exists in relation to herd behaviour.…”