Investor herding in the Finnish stock market
Leskinen, Jon (2020)
2020
Tuotantotalouden DI-tutkinto-ohjelma - Degree Programme in Industrial Engineering and Management, MSc (Tech)
Tekniikan ja luonnontieteiden tiedekunta - Faculty of Engineering and Natural Sciences
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Hyväksymispäivämäärä
2020-02-25
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:tuni-202002051866
https://urn.fi/URN:NBN:fi:tuni-202002051866
Tiivistelmä
This thesis studies herding in the Finnish stock market between 1.7.2005 and 30.6.2009. Key questions are (1) was there herding in the Finnish market during that time, (2) is there a link between herding and returns and (3) is there a link between herding and volatility. Herding was measured using the herding measure developed by Lakonishok, Shleifer and Vishny (1992). The relationship between herding and returns and herding and volatility was studied using a mixedeffects regression model. The data used was provided by Euroclear Finland Oy.
During the study period considerable amount of herding was found. The average amount of herding during the whole study period was 10.10 %. In the pre-crisis period the average amount was 9.79 %; in the crisis period 10.40 %. In the pre-crisis period the buy herding measure and sell herding measure had almost identical values. During the crisis period a clear gap emerged, when the buy herding measure decreased to 7.23 % while the sell herding measure increased to 12.11 %. This implies that during a crisis sell-side herding is more common than buy-side herding.
It seems that household investors and institutional investors both herd less than the average investor in the Finnish market. When looking at the whole study period of 2005 - 2009, institutional investors herded on average less than household investors. However, in the crisis period of 2007 - 2009 institutions herded slightly more than household investors.
During the whole study period, on average, large capitalization stocks experienced more herding than small capitalization stocks. The lowest levels of herding were observed in health care and consumer staples industries. Highest levels of herding were observed in telecommunication services, materials and utilities.
A statistically significant link between past returns and herding was found. High past returns correlate with higher sell-side herding, while poor past returns correlate with higher buy-side herding. This implies that investors in the Finnish market followed a contrarian investment strategy, selling past winners and buying past losers.
Regarding herding and future returns some statistically significant correlations were found, but on the whole the results were inconclusive. When studying the link between herding and both past and future volatility, no conclusive results were obtained.
During the study period considerable amount of herding was found. The average amount of herding during the whole study period was 10.10 %. In the pre-crisis period the average amount was 9.79 %; in the crisis period 10.40 %. In the pre-crisis period the buy herding measure and sell herding measure had almost identical values. During the crisis period a clear gap emerged, when the buy herding measure decreased to 7.23 % while the sell herding measure increased to 12.11 %. This implies that during a crisis sell-side herding is more common than buy-side herding.
It seems that household investors and institutional investors both herd less than the average investor in the Finnish market. When looking at the whole study period of 2005 - 2009, institutional investors herded on average less than household investors. However, in the crisis period of 2007 - 2009 institutions herded slightly more than household investors.
During the whole study period, on average, large capitalization stocks experienced more herding than small capitalization stocks. The lowest levels of herding were observed in health care and consumer staples industries. Highest levels of herding were observed in telecommunication services, materials and utilities.
A statistically significant link between past returns and herding was found. High past returns correlate with higher sell-side herding, while poor past returns correlate with higher buy-side herding. This implies that investors in the Finnish market followed a contrarian investment strategy, selling past winners and buying past losers.
Regarding herding and future returns some statistically significant correlations were found, but on the whole the results were inconclusive. When studying the link between herding and both past and future volatility, no conclusive results were obtained.