The Profitability of Herding : Evidence from Taiwan

This study shows that the level of herding in an industry can be the basis for a profitable investment strategy. Using data from the Taiwanese stock market wherein the presence of investor herding has already been documented, we find that industries that experience high level of herding yield higher subsequent returns regardless of their past performance. Consequently, we show that a herding-based investment strategy generates significant profits, even after adjusting for risk. Our findings also show that the herding effect when combined with past performance as part of a conditional investment strategy yields significant profits regardless of the formation and holding periods. The findings suggest that the level of herding could serve as a systematic driver of returns and could be exploited for profitable investment strategies