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Bayesian analysis of herding behaviour: an application to Spanish equity mutual funds

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  • Laura Andreu
  • Pilar Gargallo
  • Manuel Salvador
  • José Luis Sarto

Abstract

This paper proposes a dynamic Bayesian rolling window estimation procedure applied to the three‐factor model of Fama and French to analyse herding behaviour in the style exposures of mutual funds. This procedure allows a user to dynamically select the length of the estimation window by means of weighted likelihood functions that discount the loss of information because of time. This method is very flexible and allows us to consider different approaches of detecting herding behaviour by taking into account the uncertainty associated in the estimation of the style coefficients. In particular, the paper first determines the convergence behaviour following the traditional LSV herding measure and then refines this method by removing the influence exerted by market conditions, such as market volatility and returns, on this convergence. This process is empirically illustrated by an application to Spanish equity mutual funds. Copyright © 2014 John Wiley & Sons, Ltd.

Suggested Citation

  • Laura Andreu & Pilar Gargallo & Manuel Salvador & José Luis Sarto, 2015. "Bayesian analysis of herding behaviour: an application to Spanish equity mutual funds," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 31(6), pages 745-761, November.
    • Handle: RePEc:wly:apsmbi:v:31:y:2015:i:6:p:745-761
    DOI: 10.1002/asmb.2087
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    Cited by:

    1. Puput Tri Komalasari & Marwan Asri & Bernardinus M. Purwanto & Bowo Setiyono, 2022. "Herding behaviour in the capital market: What do we know and what is next?," Management Review Quarterly, Springer, vol. 72(3), pages 745-787, September.
    2. Hudson, Yawen & Yan, Meilan & Zhang, Dalu, 2020. "Herd behaviour & investor sentiment: Evidence from UK mutual funds," International Review of Financial Analysis, Elsevier, vol. 71(C).
    3. Cheng, Tingting & Xing, Shuo & Yao, Wenying, 2022. "An examination of herding behaviour of the Chinese mutual funds: A time-varying perspective," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

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