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Herding and the role of foreign institutions in emerging equity markets

  • Chang, Charles

This study examines herding surrounding qualified foreign institutional investors (QFIIs) in an emerging equity market. Using five years of weekly order flow data, I find that, when QFIIs increase (decrease) their weightings in particular sectors, dealers', margin traders', and mutual funds' holdings/weightings likewise increase (decrease) during the same and following weeks, despite controls for return and trading momentum. This herding is potentially destabilizing as prices overshoot and mean revert highlighting the potential negative impact of this level of transparency and of the policy of disclosing QFII trading in emerging markets.

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Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 18 (2010)
Issue (Month): 2 (April)
Pages: 175-185

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Handle: RePEc:eee:pacfin:v:18:y:2010:i:2:p:175-185
Contact details of provider: Web page: http://www.elsevier.com/locate/pacfin

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  1. Kim, Kenneth A. & Nofsinger, John R., 2001. "Institutional Herding, Business Groups, and Economic Regimes: Evidence from Japan," CEI Working Paper Series 2001-16, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
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  3. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 5-35.
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  6. Hyuk Choe & Bong-Chan Kho & Rene M. Stulz, 2004. "Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea," NBER Working Papers 10502, National Bureau of Economic Research, Inc.
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  8. Madhavan, A., 1991. "Security Prices and Market Transparency," Weiss Center Working Papers 1-92, Wharton School - Weiss Center for International Financial Research.
  9. 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.
  10. Sias, Richard W. & Starks, Laura T., 1997. "Return autocorrelation and institutional investors," Journal of Financial Economics, Elsevier, vol. 46(1), pages 103-131, October.
  11. Richard W. Sias, 2004. "Institutional Herding," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
  12. Mark Grinblatt & Matti Keloharju, 2000. "Distance, Language, and Culture Bias: The Role of Investor Sophistication," Yale School of Management Working Papers ysm142, Yale School of Management, revised 01 Nov 2001.
  13. Andrade, Sandro C. & Chang, Charles & Seasholes, Mark S., 2008. "Trading imbalances, predictable reversals, and cross-stock price pressure," Journal of Financial Economics, Elsevier, vol. 88(2), pages 406-423, May.
  14. 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.
  15. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August.
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