Trading Strategies And Herding

Question 1

What are the different views on the aggregate market and individual investors? 3

Answer 1

• individual investors:sophisticated investors follow momentum strategies
• institutions use momentum strategies
• Chinese institutions are momentum investors, but less wealthy investors are contrarian

Question 2

What are Badrinath and Wahal’s (2002) views?

Answer 2

Institutions are momentum traders for entries but contrarian traders for exits/adjustments

Question 3

What is herding?

Answer 3

Individuals who suppress their own beliefs and base their investment decisions solely on the collective actions of the market, even though they may disagree with it

Question 4

What are the 6 causes of herding?

Answer 4

• conformity:feeling comfort in going with the crowd
• congruity:seeking out info that matches beliefs
• conservatism bias:when you are slow to update prior info because your think that things follow a certain direction
• rumour Heuristic:ambiguity leads people to listen to rumours
• information reasons:imitate decisions of others
• career/reputation all reasons:bad manager follows good manage

Question 5

What does herding lead to? 2

Answer 5

• poor information aggregation

- overreaction

Question 6

What is the evidence that trading strategies based in past returns can be profitable? 2

Answer 6

• Contrarian strategies:investors buy stocks that have performed poorly and sell stocks that have done well
• momentum strategies:investors buy stocks that are rising in value with the anticipation of earnings acceleration