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    Exploring short-term herding behavior in the US Corporate Bond Market
    Katsarou, Aikaterini-Maria; Athens University of Economics and Business, Department of Accounting and Finance; Chalamandaris, George
    In this dissertation we investigate herding behavior in the U.S. corporate bond market. The notion of herding behavior has been the subject to several fields of social sciences as zoology, psychology, neurology and sociology. Moreover, this phenomenon has been particularly studied by behavioral finance. Essentially, in economics and finance herding is defined as the tendency of investors to mimic actions of other investors into or out of the same securities.Several studies have dealt with investors’ herding behavior in stock exchange market. The majority of them have reported a very low (if not at all) level of herding in the particular market. Equity markets are very popular, since they have attracted interest of media, researchers and investors (retail and institutional).Thus, they have reached pretty high level of automatization, transparency, liquidity and a working efficiency in general, at least for small and thin margin trades. In this regard,the reported levels of herding behavior in the particular market make sense. On the other hand, US corporate bond market recently started attracting the attention of investors. Characteristically, the net increase on corporate bond issuances by nonfinancial firms averaged $300bn between 2007 and 2016. This shift of investors’ portfolios was mainly attributed to the zero interest policies that Federal Reserves imposed for almost a decade. In addition, corporate bond market is an inherently opaque market with intensive liquidity issues. In an attempt to increase transparency in the market the Financial Industry Regulatory Authority (FINRA), introduced on July 1st,2002 a platform known as the Trade Reporting and Compliance Engine (TRACE). Specifically, TRACE is electronic platform on which all participants in the over the counter (OTC) market of US corporate bonds are obliged to report their trades. Despite the fact that this regulation succeeded to usher more retail investors in the market and thus in turn to increase the market liquidity, institutional investors were opposed. In particular, institutional investors raise concerns that the instant dissembling of their trades might give advantage to other investors handling them, as well as their private information would be revealed. They also alleged that large trades would be impeded and ultimately the long term liquidity of the market would be harmed.Against this backdrop, US corporate bond market constitutes an ideal pool of observations to be used in the study of investors’ herding behavior. In this regard, we are taking advantage of a comprehensive dataset from TRACE to examine whether the participants of US corporate bond market do herd. In doing so, we address three key empirical questions in this dissertation: Do investors herd in the corporate bond market? If so, which investors’ category exhibits herding behavior on their daily trading activity? Last but not least, which are the main determinants of such behavior? In particular, we conduct a thorough analysis to recognize micro-structure patterns in corporate bond market. Due to the fact that our data is reported on a daily basis, we cannot talkfirmly about herding behavior. However, we can employ the methods suggested by previous studies (i.e. LSV and Sias approach) to estimate the magnitude of herding. Our main results are as follows,• We document the existence of herding behavior in US corporate bond market.• Retail investors exhibit a more severe level of herding than institutional investors.• We reveal the inefficiency of corporate bond market to cover the demand even of retail investor in short term period, creating patterns in their daily demand.• Institutional investors do not differentiate their behavior among bonds of different credit rating status and liquidity level, whereas it seems to herd more on bonds with remaining maturity between five to fifteen years as well as on bonds issued by Financial Institutions. • Retail investors herdintensively on more uncertain issues. This behavior is expressed by higher level of herding on lower credit rated and longer maturity bonds as well as on bonds issued by Financial Institutions.• Lastly, both Institutional and Retail investors expand their herding behavior on issuer level. Interestingly, retail investors exhibit the same level of herding on issuer and individual bond level.The rest of this dissertation is organized as follows. Chapter2 presents the main theories associated with herding behavior.Chapter3 reviews previous works related to this dissertation. Chapter 4 describes the examined market, the employed data as well as our construction of herding measures and the methodology used. Chapter 5 presents and analyzes the results of this current study. Lastly, Chapter 6 summarizes conclusions of our research. We also provide an Appendix which contains an attachment of results using LSV approach.