Essays on Collective Investor's Behavior

Abstract

The 1980s has given rise to a new area of Finance, namely Behavioral Finance, which challenged the so far dominance of the Neoclassical Finance. Particularly, this new area introduced concepts from cognitive psychology in order to explain investors’ behavior at the collective level. Two of the most known faucets of collective investors’ behavior are herding and feedback trading. The first one is the phenomenon where investors copy the actions of the other investors, often disregarding their own beliefs, whereas the second one involves the chase of trends on behalf of the investors.
Our thesis first examines the relationship between style investing and institutional herding under the context of a concentrated market. Style investing has been found to promote herding in numerous studies; however, given that these studies have been carried out in large markets, there has not been examined what is the impact of market concentration over this relationship, as a concentrated market may produce different trading dynamics than those in large markets. What is next is to examine the impact of the introduction of the Exchanged Traded Funds over noise trading; these relatively new financial products have special characteristics that can make them appealing to the investors and they could positively contribute towards markets’ completion. Finally, our research focuses on the issue whether institutional investors herd intentionally at the industry level; this issue has never been explored, to our knowledge, before and we will try examine this by using the interaction of institutional herding with various market and sector conditions.
As a result, our research makes a contribution to the research on herding and feedback trading, examining important issues that have not been addressed before.