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What drives the herding behavior of individual investors?

Author

Listed:
  • Maxime Merli
  • Tristan Roger

Abstract

We introduce a new measure of herding that allows for tracking dynamics of individual herding. Using a database of nearly 8 million trades by 87,373 retail investors between 1999 and 2006, we show that individual herding is persistent over time and that past performance and the level of sophistication influence this behavior. We are also able to answer a question that was previously unaddressed in the literature: is herding profitable for investors? Our unique dataset reveals that the investors trading against the crowd tend to exhibit more extreme returns and poorer risk-adjusted performance than the herders.

Suggested Citation

  • Maxime Merli & Tristan Roger, 2013. "What drives the herding behavior of individual investors?," Finance, Presses universitaires de Grenoble, vol. 34(3), pages 67-104.
  • Handle: RePEc:cai:finpug:fina_343_0067
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    Cited by:

    1. Frey, Stefan & Herbst, Patrick & Walter, Andreas, 2014. "Measuring mutual fund herding – A structural approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 219-239.
    2. repec:eee:pacfin:v:45:y:2017:i:c:p:174-185 is not listed on IDEAS
    3. Bar-Gill, Sagit & Gandal, Neil, 2017. "Online Exploration, Content Choice & Echo Chambers: An Experiment," CEPR Discussion Papers 11909, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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