Mutual Fund Herding in Response to Hedge Fund Herding and the Impacts on Stock Prices

60 Pages Posted: 1 Nov 2014

See all articles by Yawen Jiao

Yawen Jiao

University of California, Riverside

Pengfei Ye

Virginia Tech

Date Written: October 30, 2014

Abstract

We examine whether mutual funds and hedge funds herd after each other and the associated impacts on stock prices. We find strong evidence that mutual funds herd into or out of stocks following the herd of hedge funds: mutual funds’ herding measure is positively related to last quarter’s hedge fund herding. In contrast, hedge funds do not follow mutual funds. Mutual funds’ following of hedge funds leads to a sharp price reversal in the next quarter, whereas hedge fund herding itself does not destabilize prices. Further, a mutual fund’s following intensity increases with its past performance. The top 30 percent of mutual funds most active in following hedge funds do so persistently and drastically increase their herding subsequent to intense herding by hedge funds. They are also the group driving the above price reversals. Overall, our evidence is consistent with the reputational incentives of mutual fund herding and the associated price destabilization effects.

Keywords: mutual funds, hedge funds, herding, equity returns

JEL Classification: G11, G23

Suggested Citation

Jiao, Yawen and Ye, Pengfei, Mutual Fund Herding in Response to Hedge Fund Herding and the Impacts on Stock Prices (October 30, 2014). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2517063

Yawen Jiao

University of California, Riverside ( email )

Riverside, CA 92521
United States

Pengfei Ye (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

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