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Herding Behavior by Institutional Investors

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Do institutional investors exhibit herding behavior? If so, what are the causes of this behavior and what are the effects on small investors? If not, provide an alternate explanation for large price swings in equity and debt markets.

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Solution Summary

The expert explains why institutional investors display herding behavior. The alternate explanation for large price swings in equity and debt markets are determined.

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Do institutional investors exhibit herding behavior? If so, what are the causes of this behavior and what are the effects on small investors? If not, provide an alternate explanation for large price swings in equity and debt markets.

There is some evidence that institutional investors exhibit herding behavior. This trend is seen particularly in the emerging markets.
Causes of this behavior:
Researchers have identified 5 causes for this behavior:
1) Impulsive or emotional herding: When the uncertainty or market volatility increases, there is a great pressure and there is a tendency to herd. ...

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