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Portfolio Complexity and Herd Behavior: Evidence from the German Mutual Fund Market

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  • Franck, Alexander
  • Walter, Andreas
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    Abstract

    We examine the herd behavior among equity funds in Germany based on a large sample of funds from 2000 to 2009. We show that a large portion of the detected herding can be explained by identical trading among funds of the same investment company. However, we also find statistically significant stock herding among funds belonging to different fund families. In contrast to existing herding studies which analyze herd behavior within a purely national stock environment, we investigate mutual fund herding in international stocks. We contribute to the literature by analyzing the impact of portfolio complexity on herd behavior. We find the most pronounced levels of herding for funds choosing their portfolio stocks from a broad, international and therefore complex investment universe. Further, we approximate a fund s portfolio complexity by its size and find high levels of herding among the biggest funds. To analyze the herd behavior of individual funds, we introduce a new and intuitive way to assign levels of herding to funds according to their trading activity within a given period. We show that managers differentiate between buy-herding and sell-herding and that individual funds exhibit similar herding intensities within a given and a succeeding period. --

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    Bibliographic Info

    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62015.

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    Date of creation: 2012
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    Handle: RePEc:zbw:vfsc12:62015

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    1. Dorn, Daniel & Huberman, Gur & Sengmueller, Paul, 2007. "Correlated Trading and Returns," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6530, C.E.P.R. Discussion Papers.
    2. Sam Wylie, 2005. "Fund Manager Herding: A Test of the Accuracy of Empirical Results Using U.K. Data," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 78(1), pages 381-403, January.
    3. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
    4. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc.
    5. Clement, Michael B., 1999. "Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 27(3), pages 285-303, July.
    6. Malkiel, Burton G, 1995. " Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 549-72, June.
    7. Judith Chevalier & Glenn Ellison, 1998. "Career Concerns of Mutual Fund Managers," NBER Working Papers 6394, National Bureau of Economic Research, Inc.
    8. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 465-79, June.
    9. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    10. Richard W. Sias, 2004. "Institutional Herding," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
    11. Stephanie Kremer & Dieter Nautz, 2011. "Short-Term Herding of Institutional Traders: New Evidence from the German Stock Market," SFB 649 Discussion Papers SFB649DP2011-015, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    12. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
    13. Jacob, John & Lys, Thomas Z. & Neale, Margaret A., 1999. "Expertise in forecasting performance of security analysts," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 28(1), pages 51-82, November.
    14. Bolliger, Guido, 2004. "The characteristics of individual analysts' forecasts in Europe," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(9), pages 2283-2309, September.
    15. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 54(2), pages 581-622, 04.
    16. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1665-98, December.
    17. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1088-1105, December.
    18. Andreas Walter & Friedrich Moritz Weber, 2006. "Herding in the German Mutual Fund Industry," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 12(3), pages 375-406.
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    Cited by:
    1. Alexander Franck & Andreas Walter & Johannes Witt, 2013. "Momentum strategies of German mutual funds," Financial Markets and Portfolio Management, Springer, Springer, vol. 27(3), pages 307-332, September.

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