Herding in International Equity Markets

Institutional investors are often perceived as focusing on short-term trading strategies and jumping into and out of the same stocks over the same period of time. This type of trading pattern, or "herding," has attracted the attention of both academics and practitioners, as institutional investors play a central role in facilitating price discovery and incorporating new information into security prices.Despite the development of several theoretical models that have successfully explained why institutional investors may herd, empirical evidence focusing primarily on the U.S. market yields weak evidence in support of the herding hypothesis. In a recent study, Sias (2004) proposes a new herding measure and documents stronger evidence of herding in U.S. equity markets.Our project aims to provide the first and most comprehensive study to date on herding in international equity markets, covering a period of 10 years from 1999 to 2008. We will explore similarities and differences in herding patterns between non-U.S. developed markets and emerging markets. Specifically, we plan to compare patterns between underlying stocks and global depository receipts (GDRs); between different institutions, such as between commercial banks and investment banks; and between pension funds and mutual funds.Developed and emerging markets have distinct characteristics in terms of market efficiency, risk-return trade-off, level of transparency, degree of information asymmetry, and equity trading costs. It will be interesting to explore what types of investors herd more intensively to each market and what specific stock characteristics each type of investor prefers in the two types of markets. Our project has important implications for investment analysis and asset management on a global basis.