Herding of institutional investors and margin traders on extreme market movements

•Herding is associated with market conditions, traders' types and firm characters.•Institutional and individual traders make decisions based on their past trades.•Margin buyers and short sellers tend to trade together in high-volatility stock.•Institutional trades and subsequent stock returns are positively correlated.•Government policies play an important role in affecting traders' behaviors.

This paper investigates the herding tendency of foreign and domestic institutional investors and margin traders from different herding perspectives by using daily buy and sell data in Taiwan's stock market. Strong evidence indicates that herding phenomenon is closely associated with market conditions, traders' types and firm characteristics. Trading behaviors of institutional investors and margin traders are affected by their own past trades but their trading patterns change when facing large price drops. Margin traders and institutional investors have the tendency to sell past losers upon large market price declines and buy past winners upon large market price rises.