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The Effects of Stock Characteristics on the Direction and Extent of Herding by Foreign Institutional Investors in the Taiwan Stock Exchange

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  • Hao Fang
  • Yang-Cheng Lu
  • Hwey-Yun Yau

Abstract

We use a dynamic herding measure to explore the causes of foreign institutional investor (FII) herding in the Taiwan stock market and examine the effects of stock characteristics on the direction and extent of such herding. We find that FII herding primarily results from cascades rather than habit investing or momentum trading. The result of a panel smooth transition regression shows that FIIs' negative cascades focus on their largest net purchases of stocks, but FIIs' positive cascades focus on winner and small-sized stocks. To increase portfolio returns, investors can use FIIs' cascades to inform their stock purchases.

Suggested Citation

  • 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.
    • Handle: RePEc:mes:emfitr:v:50:y:2014:i:2s:p:60-74
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