Did institutions herd during the internet bubble?

Did institutions herd during the internet bubble? We examine the trading behavior of institutional investors during the internet bubble and crash of 1998–2001, and its impact on stock prices. Similar to some recent findings concerning the trading behavior of hedge funds and NASDAQ 100 stocks, we find that during the bubble all types of institutions herded with great intensity into internet stocks for a comprehensive sample of institutional investors and internet stocks. In addition to this, we present three entirely new results. First, institutional herding was much greater than what can be explained by momentum trading. Second, institutions as a group continued to increase their holdings of internet stocks for two quarters past the market peak during the first quarter of 2000, and three quarters past the peak for individual stock prices, suggesting that institutions were unable to time the price peaks. Finally and most importantly, we find positive abnormal returns contemporaneous with institutional herding and negative abnormal returns (reversals) at the point that herding ceased. This finding suggests that institutions’ trading created temporary price pressures, and may have contributed to the bubble. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Did institutions herd during the internet bubble?

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Publisher
Springer US
Copyright
Copyright © 2012 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-012-0320-1
Publisher site
See Article on Publisher Site

Abstract

We examine the trading behavior of institutional investors during the internet bubble and crash of 1998–2001, and its impact on stock prices. Similar to some recent findings concerning the trading behavior of hedge funds and NASDAQ 100 stocks, we find that during the bubble all types of institutions herded with great intensity into internet stocks for a comprehensive sample of institutional investors and internet stocks. In addition to this, we present three entirely new results. First, institutional herding was much greater than what can be explained by momentum trading. Second, institutions as a group continued to increase their holdings of internet stocks for two quarters past the market peak during the first quarter of 2000, and three quarters past the peak for individual stock prices, suggesting that institutions were unable to time the price peaks. Finally and most importantly, we find positive abnormal returns contemporaneous with institutional herding and negative abnormal returns (reversals) at the point that herding ceased. This finding suggests that institutions’ trading created temporary price pressures, and may have contributed to the bubble.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 14, 2012

References

  • Options and the bubble
    Battalio, R; Schultz, P
  • Hedge funds and the technology bubble
    Brunnermeirer, M; Nagel, S
  • Institutional trade persistence and long-term equity returns
    Dasgupta, A; Prat, A; Verardo, M
  • The price impact of institutional herding
    Dasgupta, A; Prat, A; Verardo, M
  • Mutual funds and bubbles: the surprising role of contractual incentives
    Dass, N; Massa, M; Patgiri, R

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