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Institutional Herding in Bond Markets

Author

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  • Oehler, Andreas
  • Chao, George Goeth-Chi

Abstract

Recent research has shown that institutional herding is a relevant phenomenon in stock markets. Do institutional investors also follow each other in bond markets? This paper focuses on the German bond market and uses data from 57 German mutual funds that invest mainly in DM-denominated bonds, which represents 71% of the total market volume. Due to the variety and large number of bonds that exist, we do not expect mutual funds to herd with regard to separate bonds. We believe instead that bonds with the same characteristics such as interest rate, maturity, collateral, or issuer are considered to be equivalent by institutional investors. Consequently, we construct "bond groups" consisting of similar bonds and analyze herding at a "bond group" level. Our results indicate that there is strong evidence of herding, albeit it is weaker than in stock markets. Further analysis suggests that mutual funds do not place an equal weight on different bond characteristics. Nominal interest rates appear to be most important in the bond selection process.

Suggested Citation

  • Oehler, Andreas & Chao, George Goeth-Chi, 2000. "Institutional Herding in Bond Markets," Discussion Papers 13, University of Bamberg, Chair of Finance.
    • Handle: RePEc:zbw:bamfin:13
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    Citations

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    Cited by:

    1. Raphaëlle Bellando, 2010. "Measuring herding intensity: a hard task," Working Papers halshs-00517610, HAL.
    2. Mohamed El Hedi Arouri & Raphaëlle Bellando & Sébastien Ringuedé & Anne-Gaël Vaubourg, 2013. "Herding in French stock markets: Empirical evidence from equity mutual funds," Post-Print halshs-01066726, HAL.
    3. Łukasz Dopierała & Magdalena Mosionek-Schweda, 2020. "Pension Fund Management, Investment Performance, and Herding in the Context of Regulatory Changes: New Evidence from the Polish Pension System," Risks, MDPI, vol. 9(1), pages 1-19, December.
    4. Choi, Nicole & Skiba, Hilla, 2015. "Institutional herding in international markets," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 246-259.
    5. Chia‐Chun Chiang & Greg Niehaus, 2020. "Correlated Trading by Life Insurers and Its Impact on Bond Prices," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 597-625, September.
    6. Mohamed AROURI & Raphaëlle BELLANDO & Sébastien RINGUEDE & Anne-Gaël VAUBOURG, 2009. "Herding by instutional investors: empirical evidence from french mutual funds," LEO Working Papers / DR LEO 700, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    7. Chung, Chune Young & DeVault, Luke & Wang, Kainan, 2019. "Perceived information, short interest, and institutional demand," Journal of Empirical Finance, Elsevier, vol. 54(C), pages 22-38.
    8. Ali GÜVERCİN, 2016. "Sentimental Herding: The Role of Regional and Global Shocks in Egyptian and Saudi Stock Markets," Sosyoekonomi Journal, Sosyoekonomi Society, issue 24(27).

    More about this item

    Keywords

    Mutual Funds; Herding; Imitation; Coordination; Behavioral Finance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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