Industry Herding and Momentum

• DOI: 10.3905/joi.2012.21.1.089
• Publication Date: 2012-02-28T10:49:54Z
• Authors: Zhipeng Yan; Yan Zhao; Libo Sun
• Keywords: 0502 economics and business; 05 social sciences

Theoretical models on herd behavior predict that under different assumptions, herding can drive prices away from (or toward) fundamentals and reduce (or enhance) market efficiency. In this article, we study the joint effect of herding and momentum at the industry level. We find that the momentum effect is magnified when there is a low level of investor herding. Herd behavior in investors helps move asset prices toward fundamentals, enhances market efficiency, and reduces the momentum effect. A trading strategy taking a long position in winner industries and a short position in loser industries when the herding level is low can generate significant returns.