Foreigners' perceptions of U.S. markets: Do foreigners exhibit herding tendencies?

This paper investigates the herding behaviors and investment performance of foreign investors in the U.S. market. Little evidence is found of foreigners' herding behavior within one time period. However, there is strong evidence that foreign investors follow their past behavior into and out of the U.S. market over adjacent months. Foreigners' buy-side behavior of buying U.S. equities as a group is positively related to past high returns in the U.S. market and this buy-side behavior leads to superior investment performance. Evidence shows that independent of whether the U.S. market is up or down, foreign investors continue to increase their holdings of U.S. equities and these purchasing activities result in superior performance. When the U.S. market experiences extreme ups and downs, foreigners are net purchasers one month before and after the market moves and, in general, they perform well.