Herding in Trading by Amateur and Professional Investors

Abstract

We study herding behavior of amateur and professional investors using a unique data-set consisting of all their daily transactions during a four-year period, and explore the factors that can explain such behavior and examine to what extent is herding information-driven. We distinguish between stock specific features such as systematic risk, idiosyncratic risk, and size, on the one hand, and market factors such as total stock market volume and returns on the other hand. We find herding a tendency among both types of investors and that this tendency is higher for amateurs. Herding is affected by both risk and size: it is a decreasing function of the size of the firm, and an increasing function of its risk. Idiosyncratic risk tends to positively affect herding but this effect is significantly lower for professionals. Systematic risk however positively influences only herding by professionals. Our data also reveal that herding behavior of the two groups is a persistent phenomenon, and that it is closely related to the volatility of market returns. In addition, amateurs' herding is weakly related to market returns. Most of the results are consistent in general with the theory that herding is information-based.

Keywords: Herding, professional investors, amateur investors, behavioral finance

JEL Classification: G0, G11, G14