Herding Behavior - Evidence from Portuguese Mutual Funds

Abstract

We test for herding by Portuguese mutual funds over the period of 1998 to 2000. We employ the (herding) measure of trading suggested by Lakonishok, Schleifer, Thaler and Vishny (1992). We find strong evidence of herding behavior for Portuguese mutual funds. Furthermore, our results suggest that the level of herding is 4 to 5 times stronger than the herding found for institutional investors in mature markets. The herding effect seems to affect, as likely, purchases and sales of stocks. There seems to be a stronger tendency to herd among medium-cap funds rather than very large or very small funds, and for funds that hold fewer stocks in their portfolios. Lastly, herding seems to decrease when the stock market is doing well or is more volatile. Keywords: Herding Behavior; Capital Markets; Mutual Funds.