Herding in Smart-Beta Investment Products

Abstract

We highlight herding of investors as one major risk factor that is typically ignored in statistical approaches to portfolio modelling and risk management. Our survey focuses on smart-beta investing where such methods and investor herding seem particularly relevant but its negative effects have not yet come to the fore. We point out promising and novel approaches of modelling herding risk which merit empirical analysis. This financial economists’ perspective supplements the vast statistical exploration of implementing factor strategies.