Investors' herd behavior: Rational or irrational?

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

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

28 Citations (Scopus)


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
Issue number5
Publication statusPublished - 2013 Oct


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

ASJC Scopus subject areas

  • Finance


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