The Relationship between the Disposition Effect and Herding Behavior: Evidence from Taiwan’s Information Technology Stocks
This study aims to explore the relationship between the
disposition effect and herding behavior of investors trading Taiwanese
information technology stocks. This study differs from previous
literature in two aspects. First, in contrast with the earlier studies that
focused on investigating investors’ herding behavior, this study
explores the possibility that the disposition effect drives investors’
herding behavior. Additionally, it takes an in-depth look at the
interdependence between the disposition effect and herding behavior
of investors, including lead-lag relationship and volatility transmission
effect. Empirical results show that investors trading Taiwan’s
information technology stocks exhibit pronounced herding behavior
and that the disposition effect has a great impact on their herding
behavior.
<p>[1] A. Kraus and H. R. Stoll, “Parallel trading by institutional investors,”
Journal of Financial and Quantitative Analysis, vol. 7, pp. 2107-2138,
1972.
[2] R. C. Klemkosky, “The impact and efficiency of institutional net trading
imbalances,” Journal of Finance, vol. 32, pp. 79-86, 1977.
[3] J. Nofsinger and R. Sias, “Herding and feedback trading by institutional
and individual investors,” Journal of Finance, vol. 54, pp. 2263-2295,
1999.
[4] R.M. Ennis and M. D. Sebastian, “A critical look at the case for hedge
funds,” Journal of Portfolio Management, vol. 29, pp. 103-112, 2003.
[5] N. M. Boyson, “Implicit incentives and reputational herding by hedge
fund managers,” Journal of Empirical Finance, vol. 17, pp. 283-299,
2010.
[6] W. Kim and N. Jegadeesh, “Do analysts herd? An analysis of
recommendations and market reactions,” Review of Financial Studies, vol.
23, pp. 901-937, 2010.
[7] W. G. Christie and R.D. Huang, “Following the pied piper: Do individual
returns herd around the market?” Financial Analysts Journal, vol. 51, pp.
31-37, 1995.
[8] H. Choe, B. C. Kho, and R. M. Stulz, “Do foreign investors destabilize
stock markets? The Korean experience in 1997,” Journal of Financial
Economics, vol. 54, pp. 227-264, 1999.
[9] Y. Chen, C. Wang, and F. Lin, 2008. “Do qualified foreign institutional
investors herd in Taiwan’s securities Market?” Emerging Markets
Finance and Trade, vol. 44, pp. 62-74, 2008.
[10] S. Voronkova and M. T. Bohl, “Institutional traders’ behavior in an
emerging stock market: Empirical evidence on Polish pension fund
investors,” Journal of Business Finance & Accounting, vol. 32, pp.
1537-1560, 2005.
[11] A. Walter and F. M. Weber, “Herding in the German mutual fund
industry,” European Financial Management, vol. 12, pp. 375-406, 2006.
[12] E. C. Chang, J. W. Cheng, and A. Khorana, “An examination of herd
behavior in equity markets: Am international perspective,” Journal of
Banking & Finance, vol. 24, pp. 1651-1679, 2000.
[13] T. C. Chiang and D. Zheng, “An empirical analysis of herd behavior in
global stock markets,” Journal of Banking & Finance, vol. 34, pp.
1911-1921, 2010.
[14] C. Chang, “Herding, and the role of foreign institutions in emerging
equity markets,” Pacific-Basin Finance Journal, vol. 28, pp. 175-185,
2010.
[15] I. Venezia, A. Nashikkar, and Z. Shapira, “Firm specific and macro
herding by professor and amateur investors and their effects on market
volatility,” Journal of Banking & Finance, vol. 35, pp. 1599-1609, 2011.
[16] I. Welch, “Sequential sales, learning and cascades,” Journal of Finance,
vol. 47, pp. 695-732, 1992.
[17] K. A. Froot, D. S. Scharfstein, and J. C. Stein, “Herd on the street:
Informational inefficiencies in a market with short-term speculation,”
Journal of Finance, vol. 47, pp. 1461-1484, 1992.
[18] M. Belhoula and K. Naoui, “Herding and positive feedback trading in
American stock market: A two co-directional behavior of investors,”
International Journal of Business & Management, vol. 6, pp. 244-252,
2011.
[19] E. Vallelado, B. Fernandez, T. G. Merino, R. Mayoral, and V. S. Alvarez,
“Herding, information uncertainty and investors’ cognitive profile,”
Qualitative Research in Financial Markets, vol. 3, pp. 7-33, 2011.
[20] T. Liao, C. Huang, and C. Wu, “Do fund managers herd to counter
investor sentiment?” Journal of Business Research, vol. 64, pp. 207-212,
2011.
[21] H. Shefrin and M. Statman, “The disposition to sell winners too early and
ride losers too long: Theory and evidence,” Journal of Finance, vol. 40,
pp. 777-790, 1985.
[22] T. Odean, “Are investors reluctant to realize their losses?” Journal of
Finance, vol. 53, pp. 1775-1798, 1998.
[23] B. Barber, Y. Lee, Y. Liu, and T. Odean, “Is the aggregate investor
reluctant to realize losses: Evidence from Taiwan,” European Financial
Management, vol. 13, pp. 423-447, 2007.
[24] V. Singal and Z. Xu, “Selling winners, holding losers: Effect on fund
flows and survival of disposition-prone mutual fund,” Journal of Banking
& Finance, vol. 35, pp. 2704-2718, 2011.
[25] R. Garvey and A. Murphy, “Are professional traders too slow to realize
their losses?” Financial Analysts Journal, vol. 60, pp. 35-43, 2004.
[26] R. Chiang and W. M. Fong, “Relative informational efficiency of cash,
futures, and options markets: The case of an emerging market,” Journal of
Banking & Finance, vol. 25, pp. 355-375, 2001.
[27] C.-H. Chang, H.-I. Cheng, I.-H. Huang, and H.-H. Huang, “Lead-lag
relationship, volatility asymmetry, and overreaction phenomenon,”
Managerial Finance, vol. 37, pp. 47-71, 2011.
[28] T. Bollerslev, “Modelling the coherence in short-run nominal exchange
rates: A multivariate generalized ARCH model,” Review of Economics
and Statistics, vol. 72, pp. 498-505, 1990.
[29] A.-S. Chen and B.-S. Hong, “Institutional ownership changes and returns
around analysts' earnings forecast release events: Evidence from Taiwan,”
Journal of Banking and Finance, vol. 30, pp. 2471-2488, 2006.
[30] C.-H. Chang, C.-C. Tsai, I.-H. Huang, and H.-H. Huang, “Intraday
evidence on the relationship among great events, herding behavior, and
investor’s sentiments,” Chiao Da Management Review, vol. 32, pp.
61-106, 2012.</p>
<p>[1] A. Kraus and H. R. Stoll, “Parallel trading by institutional investors,”
Journal of Financial and Quantitative Analysis, vol. 7, pp. 2107-2138,
1972.
[2] R. C. Klemkosky, “The impact and efficiency of institutional net trading
imbalances,” Journal of Finance, vol. 32, pp. 79-86, 1977.
[3] J. Nofsinger and R. Sias, “Herding and feedback trading by institutional
and individual investors,” Journal of Finance, vol. 54, pp. 2263-2295,
1999.
[4] R.M. Ennis and M. D. Sebastian, “A critical look at the case for hedge
funds,” Journal of Portfolio Management, vol. 29, pp. 103-112, 2003.
[5] N. M. Boyson, “Implicit incentives and reputational herding by hedge
fund managers,” Journal of Empirical Finance, vol. 17, pp. 283-299,
2010.
[6] W. Kim and N. Jegadeesh, “Do analysts herd? An analysis of
recommendations and market reactions,” Review of Financial Studies, vol.
23, pp. 901-937, 2010.
[7] W. G. Christie and R.D. Huang, “Following the pied piper: Do individual
returns herd around the market?” Financial Analysts Journal, vol. 51, pp.
31-37, 1995.
[8] H. Choe, B. C. Kho, and R. M. Stulz, “Do foreign investors destabilize
stock markets? The Korean experience in 1997,” Journal of Financial
Economics, vol. 54, pp. 227-264, 1999.
[9] Y. Chen, C. Wang, and F. Lin, 2008. “Do qualified foreign institutional
investors herd in Taiwan’s securities Market?” Emerging Markets
Finance and Trade, vol. 44, pp. 62-74, 2008.
[10] S. Voronkova and M. T. Bohl, “Institutional traders’ behavior in an
emerging stock market: Empirical evidence on Polish pension fund
investors,” Journal of Business Finance & Accounting, vol. 32, pp.
1537-1560, 2005.
[11] A. Walter and F. M. Weber, “Herding in the German mutual fund
industry,” European Financial Management, vol. 12, pp. 375-406, 2006.
[12] E. C. Chang, J. W. Cheng, and A. Khorana, “An examination of herd
behavior in equity markets: Am international perspective,” Journal of
Banking & Finance, vol. 24, pp. 1651-1679, 2000.
[13] T. C. Chiang and D. Zheng, “An empirical analysis of herd behavior in
global stock markets,” Journal of Banking & Finance, vol. 34, pp.
1911-1921, 2010.
[14] C. Chang, “Herding, and the role of foreign institutions in emerging
equity markets,” Pacific-Basin Finance Journal, vol. 28, pp. 175-185,
2010.
[15] I. Venezia, A. Nashikkar, and Z. Shapira, “Firm specific and macro
herding by professor and amateur investors and their effects on market
volatility,” Journal of Banking & Finance, vol. 35, pp. 1599-1609, 2011.
[16] I. Welch, “Sequential sales, learning and cascades,” Journal of Finance,
vol. 47, pp. 695-732, 1992.
[17] K. A. Froot, D. S. Scharfstein, and J. C. Stein, “Herd on the street:
Informational inefficiencies in a market with short-term speculation,”
Journal of Finance, vol. 47, pp. 1461-1484, 1992.
[18] M. Belhoula and K. Naoui, “Herding and positive feedback trading in
American stock market: A two co-directional behavior of investors,”
International Journal of Business & Management, vol. 6, pp. 244-252,
2011.
[19] E. Vallelado, B. Fernandez, T. G. Merino, R. Mayoral, and V. S. Alvarez,
“Herding, information uncertainty and investors’ cognitive profile,”
Qualitative Research in Financial Markets, vol. 3, pp. 7-33, 2011.
[20] T. Liao, C. Huang, and C. Wu, “Do fund managers herd to counter
investor sentiment?” Journal of Business Research, vol. 64, pp. 207-212,
2011.
[21] H. Shefrin and M. Statman, “The disposition to sell winners too early and
ride losers too long: Theory and evidence,” Journal of Finance, vol. 40,
pp. 777-790, 1985.
[22] T. Odean, “Are investors reluctant to realize their losses?” Journal of
Finance, vol. 53, pp. 1775-1798, 1998.
[23] B. Barber, Y. Lee, Y. Liu, and T. Odean, “Is the aggregate investor
reluctant to realize losses: Evidence from Taiwan,” European Financial
Management, vol. 13, pp. 423-447, 2007.
[24] V. Singal and Z. Xu, “Selling winners, holding losers: Effect on fund
flows and survival of disposition-prone mutual fund,” Journal of Banking
& Finance, vol. 35, pp. 2704-2718, 2011.
[25] R. Garvey and A. Murphy, “Are professional traders too slow to realize
their losses?” Financial Analysts Journal, vol. 60, pp. 35-43, 2004.
[26] R. Chiang and W. M. Fong, “Relative informational efficiency of cash,
futures, and options markets: The case of an emerging market,” Journal of
Banking & Finance, vol. 25, pp. 355-375, 2001.
[27] C.-H. Chang, H.-I. Cheng, I.-H. Huang, and H.-H. Huang, “Lead-lag
relationship, volatility asymmetry, and overreaction phenomenon,”
Managerial Finance, vol. 37, pp. 47-71, 2011.
[28] T. Bollerslev, “Modelling the coherence in short-run nominal exchange
rates: A multivariate generalized ARCH model,” Review of Economics
and Statistics, vol. 72, pp. 498-505, 1990.
[29] A.-S. Chen and B.-S. Hong, “Institutional ownership changes and returns
around analysts' earnings forecast release events: Evidence from Taiwan,”
Journal of Banking and Finance, vol. 30, pp. 2471-2488, 2006.
[30] C.-H. Chang, C.-C. Tsai, I.-H. Huang, and H.-H. Huang, “Intraday
evidence on the relationship among great events, herding behavior, and
investor’s sentiments,” Chiao Da Management Review, vol. 32, pp.
61-106, 2012.</p>
@article{"International Journal of Business, Human and Social Sciences:57195", author = "Chih-Hsiang Chang", title = "The Relationship between the Disposition Effect and Herding Behavior: Evidence from Taiwan’s Information Technology Stocks", abstract = "This study aims to explore the relationship between the
disposition effect and herding behavior of investors trading Taiwanese
information technology stocks. This study differs from previous
literature in two aspects. First, in contrast with the earlier studies that
focused on investigating investors’ herding behavior, this study
explores the possibility that the disposition effect drives investors’
herding behavior. Additionally, it takes an in-depth look at the
interdependence between the disposition effect and herding behavior
of investors, including lead-lag relationship and volatility transmission
effect. Empirical results show that investors trading Taiwan’s
information technology stocks exhibit pronounced herding behavior
and that the disposition effect has a great impact on their herding
behavior.
", keywords = "Herding behavior, Disposition effect, Behavioral
finance.", volume = "7", number = "7", pages = "2075-5", }
