To Herd or Not to Herd: Do Mimicking Traders Ignore Their Private Information?

摘要

The theory of informational cascades culminating in Grenadier (1999) shows that rational investors who receive private signals and observe each other’s trades, trade in sequence: those with stronger signals trade first. Investors who follow earlier trades do not ‘herd’, unless acting contrary to their own signals. We built a set of observations of fund managers’ daily trades, unique proxies for trades’ informational content based on ‘stealth trading,’ and whether or not private information is acted upon. This enabled us to conduct the first test of herding models. We find that fund managers do trade in sequence, in support of an earlier conjecture. They also identify the most valuable leader trades to mimic. There is little evidence of herding other than for a horizon of a year with four or more followers.