Do fund managers herd in frontier markets — and why?

Abstract

Frontier markets constitute a category of markets for which very little is known regarding the behaviour of their institutional investors. This study attempts to shed light on this issue by investigating whether fund managers herd in frontier markets and whether their herding is intentional or not using data on quarterly portfolio holdings of funds from two such markets (Bulgaria and Montenegro). Results show that fund managers herd significantly in both markets; controlling for the interaction of their herding with different market states, we find that herding is stronger for both markets during periods of positive market performance and high volume, while in the case of Montenegro it also appears significant during periods of low volatility. Our findings are consistent with fund managers herding intentionally, in anticipation of informational and/or professional payoffs. We also find that Bulgarian (Montenegrin) fund managers herd significantly after (before) the outbreak of the 2008 global financial crisis and we attribute this to a volume-effect, since Montenegro (Bulgaria) saw the heaviest trading activity before (after) the crisis' outbreak.

OPECmeetings, oil market volatility and herding behaviour in the Saudi Arabia stock market

“…Herding is found to be more pronounced in emerging markets than in developed markets (Borensztein & Gelos, 2003). Other studies on developing equity markets include, Economou, Gavriilidis, Kallinterakis, and Yordanov (2015) which examine herding in frontier markets; Chang et al (2000) and Demirer, Kutan, and Chen (2010) in Taiwan financial market; Tan et al (2008) and Chiang and Zheng (2010)) investigate herding in Chinese equity markets; and Rahman et al (2015) and many other assess herding in the GCC equity markets 10 . Our study is related to these studies but we are distinguished by accounting for fundamental and style co‐movements in return premia before drawing our inferences on herding in Saudi equities.…”

Herding in frontier markets: Evidence from African stock exchanges

“…Fund managers, for example, tend to exhibit significantly higher levels of herding in Portugal (Holmes et al, 2013), South Korea (Choe et al, 1999) and Taiwan (Chang, 2010;Lu et al, 2012), compared to Spain (Gavriilidis et al, 2013), the UK (Wylie, 2005), Germany (Walter and Weber, 2006;Kremer and Nautz, 2013) and the US (Lakonishok et al, 1992;Grinblatt et al, 1995;Wermers, 1999;Sias, 2004;Choi and Sias, 2009). Evidence from frontier markets (Economou et al, 2015b) has shown that they also accommodate substantial institutional herding, whose levels are significantly higher compared to those documented in emerging markets. The picture remains similar when assessing herding at the aggregate market level.…”

“…Given the relatively limited research on frontier markets' herding and its determinants (Balcilar et al, 2013;Economou et al, 2015b), our study contributes in that direction by investigating herding in African frontier stock exchanges, addressing several research questions. First, we examine whether herding is significant in frontier markets in Africa and whether it presents us with size-effect, in view of the low trading activity and high market concentration typifying frontier markets in general.…”

“…This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/ of their populations (large sections of which are under age 15) and the rising per capita income levels point towards a gradual rise in living standards and suggest a considerable growth potential for several sectors (such as banking and information technology, whose levels of penetration in their local populations are currently moderate) and a greater diversification of their economic activity (Speidell, 2011). This is also expected to have important implications for the development of their financial markets, which are currently characterized mainly by incomplete and ill-enforced institutional frameworks, with low transparency levels (Economou et al, 2015b). These conditions at present tend to deter investors (be they local or foreign) from participating in these markets, the result being that most frontier equity markets are small, very highly concentrated and illiquid, with very low levels of capitalization and trading volume (Marshall et al, 2015).…”

Herd behavior in the drybulk market: an empirical analysis of the decision to invest in new and retire existing fleet capacity

“…Further, we test for asymmetric herd behavior effects in terms of extreme market movements, contraction and expansion phases; and whether there are any spill-over herding effects from one market 2 In the drybulk market, the efficient market hypothesis (EMH) and asset pricing models focus mainly on the term structure of freight rates, vessel price formation, risk premium and trading strategies (Kavussanos and Alizadeh, 2002;Adland and Koekebakker, 2004;Kavussanos et al, 2004;Adland and Strandenes, 2006;Alizadeh and Nomikos, 2006;Alizadeh and Nomikos, 2007). However, herding behavior may not always be regarded as an anomaly which contradicts the efficient market hypothesis; rather, if it is assumed that investors trade in the direction of informed investors, then asset prices may converge faster to their fundamental values (Gavriilidis et al, 2013;Economou et al, 2015).…”