ECONOMICS
& FINANCE WORKSHOP
Discussion
Paper Series
When Will Investors Herd?
-- Evidence from the Chinese Stock Markets
By
Yexiao XU
School of Management
University of Texas at Dallas
Gongmeng CHEN
School of Accounting and Finance
Hong Kong Polytechnic University
And
Oliver M. RUI
Faculty of Business Administration
The Chinese University of Hong Kong
Abstract
The institutional characteristics of the Chinese stock markets provide
a unique perspective to study the herding behavior of investors. If
domestic investors are more knowledgeable or informed about individual
stocks than foreign investors, herding behavior is most likely to occur
among foreign investors. Our empirical results indicate that during
periods of extreme price movements, the relative equity return dispersions
for both Shanghai-B and Shenzhen-B actually have decreased, which provides
evidence for herd behavior. This result is robust to a different specification
which controls for informational trading. However, for both Shanghai-A
and Shenzhen-A, we find mixed and weaker results to support for herding.
Since B-share investors are foreign investors, the differential herding
behavior of local and foreign investors suggest that in the presence
of inefficient information disclosure, foreign participants tend to
trade according to other signals and to herd due to lack of fundamental
and private information on firms. We also propose an alternative approach
that involves trading volume to detect herding behavior. After controlling
for informational effect, we continue to find strong support for herding
activities in the B-share markets. Our findings are robust in terms
of portfolio size, industry grouping, and GARCH specifications.
Correspondence
Address:
Prof. Yexiao
XU
School of Management
University of Texas at Dallas
Richardson, TX 75083
U.S.A.
