Correlated Trading in Concentrated Market

Correlated trading commonly known as herding occurs when investors trade in the same direction. We examine the complete Finnish stock market from 1995 to 2004, and find a higher degree of herding than in previous studies of less concentrated markets. We find the level of correlated trading differs between investor classes with different incentives: individual investors herd more than domestic institutions and foreign institutions herd the least. Herding is stronger on the sell-side of the trades and in smaller stocks. Herding is positively associated to stock returns indicating that herding may in fact contribute to price discovery. The investor class that herds the least is most involved in positive feedback trading indicating that herding is not a result of momentum trading.