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Do Qualified Foreign Institutional Investors Herd in Taiwan's Securities Market?

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Listed:
  • Yu-Fen Chen
  • Chih-Yung Wang
  • Fu-Lai Lin

Abstract

This paper investigates whether and why qualified foreign institutional investors (QFIIs) in Taiwan herd when picking stocks. The evidence shows that QFIIs herd in Taiwan's securities market: They follow each other into and out of the same securities. We identify how the herding behavior forms and how it changes over time. The results suggest that there is an industry effect when QFIIs pick up stocks. They herd on securities classified in specific industries and also prefer stocks with high past returns as well as large firm size, supporting the argument that QFIIs are momentum traders. Characteristic herding and investigative herding explain QFIIs' trading behavior in Taiwan.

Suggested Citation

  • 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, Taylor & Francis Journals, vol. 44(4), pages 62-74, July.
  • Handle: RePEc:mes:emfitr:v:44:y:2008:i:4:p:62-74
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    References listed on IDEAS

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    1. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. " Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-1484, September.
    2. 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.
    3. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 97-124.
    4. 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.
    5. 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.
    6. John R. Nofsinger & Richard W. Sias, 1999. "Herding and Feedback Trading by Institutional and Individual Investors," Journal of Finance, American Finance Association, vol. 54(6), pages 2263-2295, December.
    7. Richard W. Sias, 2004. "Institutional Herding," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
    8. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, April.
    9. James A. Bennett, 2003. "Greener Pastures and the Impact of Dynamic Institutional Preferences," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1203-1238.
    10. 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.
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    Citations

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    Cited by:

    1. Katarzyna Bień-Barkowska, 2014. "Capturing Order Book Dynamics in the Interbank EUR/PLN Spot Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(1), pages 93-117, January.
    2. Yan-Ting Lin & Shang-Chi Gong & Sou-Shan Wu & Tsung-Pei Lee, 2012. "E/P Mean Reversion-Based Strategies for Investment Practice: Evidence from the Taiwan Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(1), pages 117-131, January.
    3. Chun-Da Chen & Alex YiHou Huang & Chih-Chun Chen, 2011. "The Effects of Abolishing a Foreign Institutional Investment Quota in Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(2), pages 74-98, March.
    4. Demirer, Rıza & Kutan, Ali M. & Zhang, Huacheng, 2014. "Do ADR investors herd?: Evidence from advanced and emerging markets," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 138-148.
    5. Chun-Da Chen & Alex YiHou Huang & Chih-Chun Chen, 2011. "The Effects of Abolishing a Foreign Institutional Investment Quota in Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(2), pages 74-98, March.
    6. Katarzyna Bień-Barkowska, 2014. "Capturing Order Book Dynamics in the Interbank EUR/PLN Spot Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(1), pages 93-117, January.
    7. Zheng, Dazhi & Li, Huimin & Zhu, Xiaowei, 2015. "Herding behavior in institutional investors: Evidence from China’s stock market," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 59-76.
    8. Demirer, Riza & Kutan, Ali M. & Chen, Chun-Da, 2010. "Do investors herd in emerging stock markets?: Evidence from the Taiwanese market," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 283-295, November.
    9. Schuppli, Michael & Bohl, Martin T., 2010. "Do foreign institutional investors destabilize China's A-share markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(1), pages 36-50, February.
    10. Yan-Ting Lin & Shang-Chi Gong & Sou-Shan Wu & Tsung-Pei Lee, 2012. "E/P Mean Reversion-Based Strategies for Investment Practice: Evidence from the Taiwan Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(1), pages 117-131, January.
    11. repec:eee:reveco:v:49:y:2017:i:c:p:370-385 is not listed on IDEAS
    12. Hao Fang & Yang-Cheng Lu & Hwey-Yun Yau, 2014. "The Effects of Stock Characteristics on the Direction and Extent of Herding by Foreign Institutional Investors in the Taiwan Stock Exchange," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(2S), pages 60-74, March.

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