Investors' herd behavior: Rational or irrational?

William T. Lin, Shih Chuan Tsai, Pei Yau Lung

Research output: Contribution to journalReview article

2 Citations (Scopus)

Abstract

This study examines the relationships between the herding of various investor groups and trading noise in the Taiwan stock market to determine whether any of the investor groups tend to herd rationally. The study uses a unique and comprehensive data set on intraday transactions and limit order books of the Taiwan Stock Exchange (TWSE). We calculate the high-frequency herding measures and trading noise in a call auction market. We find that institutional investors are likely to be informed traders and herd rationally based on superior information. Institutional investors' herding has a negative impact on trading noise. Their buy (sell) herding predicts positive (negative) future market returns. By contrast, the herding of individual investors tends to contain limited information, as it increases trading noise; the buy (sell) herding of individuals is negatively correlated with future market returns. These findings are more significant for stocks with higher turnover.

Original languageEnglish
Pages (from-to)755-776
Number of pages22
JournalAsia-Pacific Journal of Financial Studies
Volume42
Issue number5
DOIs
Publication statusPublished - 2013 Jan 1

Fingerprint

Investors
Herding
Herd behavior
Noise trading
Institutional investors
Market returns
Call auction
Informed traders
Limited information
Limit order book
Individual investors
Turnover
Taiwan stock market
Taiwan Stock Exchange
Auction market

Keywords

  • Herding
  • Individual investors
  • Institutional investors
  • Intraday transactions
  • Trading noise

ASJC Scopus subject areas

  • Finance

Cite this

Investors' herd behavior : Rational or irrational? / Lin, William T.; Tsai, Shih Chuan; Lung, Pei Yau.

In: Asia-Pacific Journal of Financial Studies, Vol. 42, No. 5, 01.01.2013, p. 755-776.

Research output: Contribution to journalReview article

Lin, William T. ; Tsai, Shih Chuan ; Lung, Pei Yau. / Investors' herd behavior : Rational or irrational?. In: Asia-Pacific Journal of Financial Studies. 2013 ; Vol. 42, No. 5. pp. 755-776.
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