The Relationship between the Disposition Effect and Herding Behavior: Evidence from Taiwan’s Information Technology Stocks
Authors: Chih-Hsiang Chang
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.
Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1087085Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 2418
 A. Kraus and H. R. Stoll, “Parallel trading by institutional investors,” Journal of Financial and Quantitative Analysis, vol. 7, pp. 2107-2138, 1972.
 R. C. Klemkosky, “The impact and efficiency of institutional net trading imbalances,” Journal of Finance, vol. 32, pp. 79-86, 1977.
 J. Nofsinger and R. Sias, “Herding and feedback trading by institutional and individual investors,” Journal of Finance, vol. 54, pp. 2263-2295, 1999.
 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.
 N. M. Boyson, “Implicit incentives and reputational herding by hedge fund managers,” Journal of Empirical Finance, vol. 17, pp. 283-299, 2010.
 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.
 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.
 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.
 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.
 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.
 A. Walter and F. M. Weber, “Herding in the German mutual fund industry,” European Financial Management, vol. 12, pp. 375-406, 2006.
 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.
 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.
 C. Chang, “Herding, and the role of foreign institutions in emerging equity markets,” Pacific-Basin Finance Journal, vol. 28, pp. 175-185, 2010.
 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.
 I. Welch, “Sequential sales, learning and cascades,” Journal of Finance, vol. 47, pp. 695-732, 1992.
 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.
 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.
 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.
 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.
 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.
 T. Odean, “Are investors reluctant to realize their losses?” Journal of Finance, vol. 53, pp. 1775-1798, 1998.
 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.
 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.
 R. Garvey and A. Murphy, “Are professional traders too slow to realize their losses?” Financial Analysts Journal, vol. 60, pp. 35-43, 2004.
 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.
 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.
 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.
 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.
 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.