Do fund managers herd in frontier markets - and why?

- We examine institutional herding in frontier markets for the first time in the literature.
- Herding is significant during up-markets periods in both markets.
- Herding is significant during high-volume periods in both markets.
- Herding is significant during periods of low volatility in Montenegro only.
- Montenegrin (Bulgarian) fund managers herd significantly before (after) the outbreak of the 2008 global crisis.

Frontier markets constitute a category of markets for which very little is known regarding the behavior of their institutional investors. This study attempts to shed light on this issue by investigating whether fund managers herd in frontier markets and whether their herding is intentional or not using data on quarterly portfolio holdings of funds from two such markets (Bulgaria and Montenegro). Results show that fund managers herd significantly in both markets; controlling for the interaction of their herding with different market states, we find that herding is stronger for both markets during periods of positive market performance and high volume, while in the case of Montenegro it also appears significant during periods of low volatility. Our findings are consistent with fund managers herding intentionally, in anticipation of informational and/or professional payoffs. We also find that Bulgarian (Montenegrin) fund managers herd significantly after (before) the outbreak of the 2008 global financial crisis and we attribute this to a volume-effect, since Montenegro (Bulgaria) saw the heaviest trading activity before (after) the crisis' outbreak.