Finance Seminar: Michela Verardo, London School of Economics

Title: Does herding behavior reveal skill? An analysis of mutual fund performance

2017.06.27 | Bodil Westermann Krog

Date Thu 30 Nov
Time 14:15 15:15
Location Fuglesangs Allé 4, 8210 Aarhus V, building 2630(K), room 101

Presenter: Michela Verardo, London School of Economics

Title: Does herding behavior reveal skill? An analysis of mutual fund performance (with Hao Jiang)

Abstract: This paper uncovers a negative relation between herding behavior and skill. Focusing on the mutual fund industry, we construct a dynamic measure of fund-level herding to capture the tendency of a fund manager to follow the trading decisions of the institutional crowd. We show that fund herding predicts performance: herding funds underperform their antiherding peers by more than 2% per year. Consistent with the theoretical literature on herding behavior, we find that differences in skill are an important driver of this performance gap. Our evidence shows that antiherding funds consistently make better investment decisions than their herding peers, even on stocks not heavily traded by institutions; antiherding behavior signals superior ability among career-concerned managers; antiherding funds can anticipate the trades of the crowd; and the performance gap between herding and antiherding funds widens in times of greater investment opportunities, when skill is more valuable.

Area of Research: Empirical Finance

Organizers: Paolo Santucci de Magistris and Agatha Murgoci

Finance and Accounting Seminar Series