The profitability of herding: evidence from Taiwan. Issue 7 (19th June 2018)

• Record Type: Journal Article
• Authors: Chen, Chun-Da; Demirer, Riza
• Is Part Of: Managerial finance. Volume 44:Issue 7(2018)
• Page Start: 919
• Page End: 934
• Publication Date: 2018-06-19
• Subjects: Herding -- State -- space model -- Return dispersion; G14 -- G15; Corporations -- Finance -- Periodicals; Business enterprises -- Finance -- Periodicals; 658.1505
• DOI: 10.1108/MF-12-2016-0357
• Languages: English
• ISSNs: 0307-4358

Abstract

Abstract : Purpose: The purpose of this paper is to show that the level of herding in an industry can be the basis for a profitable investment strategy. Design/methodology/approach: The authors apply three different herding measures in the paper, including cross-sectional standard deviation, cross-sectional absolute deviation and non-linear model – state–space model. Findings: The authors find that industries that experience a high level of herding yield higher subsequent returns regardless of their past performance. Consequently, the authors show that a herding-based investment strategy generates significant profits, even after adjusting for risk. The findings also show that the herding effect when combined with past performance as part of a conditional investment strategy yields significant profits regardless of the formation and holding periods. The findings suggest that the level of herding could serve as a systematic driver of returns and could be exploited for profitable investment strategies. Originality/value: To the best of authors' knowledge, this is the first study in the literature to show that herding by itself can serve as a determinant of returns regardless of past performance.