IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Do investors herd in emerging stock markets?: Evidence from the Taiwanese market

  • Demirer, Riza
  • Kutan, Ali M.
  • Chen, Chun-Da

This paper has three main contributions to the literature on investor herds. First, it extends investor herding studies to an emerging yet relatively sophisticated Taiwanese stock market at the sector level by using firm level data. Second, it employs different methodologies designed to test the existence of investor herds to better understand the sources of herd behavior. Third, it discusses the implications of different herding measures for investors exposed to systematic and unsystematic risks. We find that the linear model based on the cross-sectional standard deviation (CSSD) testing methodology yields no significant evidence of herding. However, the non-linear model proposed by Chang et al. (2000) and the state space based models of Hwang and Salmon (2004) lead to consistent results indicating strong evidence of herd formation in all sectors. We also find that the herding effect is more prominent during periods of market losses. Our results suggest limited diversification opportunities for investors in this market, especially during periods of market losses when diversification is most needed. Further research is necessary to see whether similar findings hold for other emerging markets.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 76 (2010)
Issue (Month): 2 (November)
Pages: 283-295

in new window

Handle: RePEc:eee:jeborg:v:76:y:2010:i:2:p:283-295
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Goldbaum, David, 2008. "Coordinated investing with feedback and learning," Journal of Economic Behavior & Organization, Elsevier, vol. 65(2), pages 202-223, February.
  2. Uchida, Hirofumi & Nakagawa, Ryuichi, 2007. "Herd behavior in the Japanese loan market: Evidence from bank panel data," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 555-583, October.
  3. Robert Weiner, 2006. "Do Birds of a Feather Flock Together? Speculator Herding in the World Oil Market," Discussion Papers dp-06-31, Resources For the Future.
  4. V. V. Chari & Patrick J. Kehoe, 2003. "Financial Crises as Herds: Overturning the Critiques," NBER Working Papers 9658, National Bureau of Economic Research, Inc.
  5. Swank, Otto & Visser, Bauke, 2008. "The consequences of endogenizing information for the performance of a sequential decision procedure," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 667-681, March.
  6. Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets; A Review," IMF Working Papers 00/48, International Monetary Fund.
  7. Anchor Y. Lin & Lin-Shang Huang & Mei-Yuan Chen, 2007. "Price Comovement and Institutional Performance Following Large Market Movements," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 43(5), pages 37-61, October.
  8. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  9. John R. Graham, 1999. "Herding among Investment Newsletters: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(1), pages 237-268, 02.
  10. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  11. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
  12. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  13. Gleason, Kimberly C. & Mathur, Ike & Peterson, Mark A., 2004. "Analysis of intraday herding behavior among the sector ETFs," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 681-694, December.
  14. Anchor Y. Lin & Lin-Shang Huang & Mei-Yuan Chen, 2007. "Price Comovement and Institutional Performance Following Large Market Movements," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 43(5), pages 37-61, October.
  15. Tan, Lin & Chiang, Thomas C. & Mason, Joseph R. & Nelling, Edward, 2008. "Herding behavior in Chinese stock markets: An examination of A and B shares," Pacific-Basin Finance Journal, Elsevier, vol. 16(1-2), pages 61-77, January.
  16. Hyuk Choe & Bong-Chan Kho & Rene M. Stulz, 1998. "Do Foreign Investors Destabilize Stock Markets? The Korean Experience in 1997," NBER Working Papers 6661, National Bureau of Economic Research, Inc.
  17. Hwang, Soosung & Salmon, Mark, 2004. "Market Stress and Herding," CEPR Discussion Papers 4340, C.E.P.R. Discussion Papers.
  18. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
  19. Cipriani, Marco & Guarino, Antonio, 2008. "Transaction costs and informational cascades in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 581-592, December.
  20. Woochan Kim & Shang-Jin Wei, 1999. "Foreign Portfolio Investors Before and During a Crisis," NBER Working Papers 6968, National Bureau of Economic Research, Inc.
  21. Omurtag, Ahmet & Sirovich, Lawrence, 2006. "Modeling a large population of traders: Mimesis and stability," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 562-576, December.
  22. Palley, Thomas I., 1995. "Safety in numbers: A model of managerial herd behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 28(3), pages 443-450, December.
  23. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
  24. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  25. Anchor Y. Lin & Peggy E. Swanson, 2003. "The Behavior and Performance of Foreign Investors in Emerging Equity Markets: Evidence from Taiwan," International Review of Finance, International Review of Finance Ltd., vol. 4(3-4), pages 189-210.
  26. Robert J. Shiller, 2002. "From Efficient Market Theory to Behavioral Finance," Cowles Foundation Discussion Papers 1385, Cowles Foundation for Research in Economics, Yale University.
  27. Choi, Nicole & Sias, Richard W., 2009. "Institutional industry herding," Journal of Financial Economics, Elsevier, vol. 94(3), pages 469-491, December.
  28. Demirer, RIza & Kutan, Ali M., 2006. "Does herding behavior exist in Chinese stock markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(2), pages 123-142, April.
  29. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
  30. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  31. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
  32. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
  33. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
  34. Chang, Eric C. & Cheng, Joseph W. & Khorana, Ajay, 2000. "An examination of herd behavior in equity markets: An international perspective," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1651-1679, October.
  35. Raghuram G. Rajan, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 399-441.
  36. Yu-Fen Chen & Chih-Yung Wang & Fu-Lai Lin, 2008. "Do Qualified Foreign Institutional Investors Herd in Taiwan's Securities Market?," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 44(4), pages 62-74, July.
  37. Spiwoks, Markus & Bizer, Kilian & Hein, Oliver, 2008. "Informational cascades: A mirage?," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 193-199, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:76:y:2010:i:2:p:283-295. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.