Herding by South African Equity Unit Trusts: An analysis of the causes and extent of herding behaviour on the JSE Limited

Wagenvoorde, Guy

Herding by South African Equity Unit Trusts: An analysis of the causes and extent of herding behaviour on the JSE Limited

Master Thesis

2022

Abstract

This dissertation examines whether South African equity unit trusts follow each other into and out of the same shares (i.e., herd), and specifically whether such herding is motivated by intent. This dissertation ascertained intent by observing the interaction of correlated trading behaviour and states of the general equity market, controlled for conditions that drive spurious correlation; namely, net fund flows and momentum/ share size trading strategies. Employing the Sias measure, the empirical results reveal strong evidence of equity unit trust herding at the individual share-level for the period December 2012 – March 2020. This dissertation further examined the reputational and informational herding hypotheses and provided evidence that unit trust managers' reputational/career concerns, as well as informational incentives contributes to unit trust herding in shares, with aggregate herding 19% more prevalent in down markets than in up markets, 36% more in low relative to high market return states, 12% more prevalent in volatile markets than in tranquil markets, and 30% more in increasing relative to decreasing market volatility states. However, this dissertation found only statistically weak evidence of herding motivated by intent under varying market states. Furthermore, there is evidence that South African equity unit trusts follow other unit trusts in large capitalisation shares (after controlling for “blue-chip” benchmark herding) and unit trusts tend to follow their own trades in small cap shares. In sum, the results provide strong evidence of herding across the unit trust industry, but this is not conclusively predicated by intent.

Keywords

Finance and Tax

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