Investor-herding-behaviour-of-Chinese-stock-market

InvestorherdingbehaviourofChinesestockmarketJuanYao⁎,ChuanchanMa,WilliamPengHeFinanceDiscipline,BusinessSchool,TheUniversityofSydney,NSW2006,AustraliaarticleinfoabstractArticlehistory:Received4September2010Receivedinrevisedform25February2013Accepted1March2013Availableonline28March2013Thispaperexaminestheexistenceandprevalenceofinvestorherdingbehaviourinasegmentedmarketsetting,theChineseAandBstockmarkets.ItisthefirststudytodetailthedifferenceinherdingbehaviouracrossAandBmarkets.Theresultsindicatethatinvestorsexhibitdifferentlevelsofherdingbehaviour,inparticular,herdingstronglyexistsintheB-sharemarkets.Wealsofindthatacrossmarketsherdingbehaviourismoreprevalentatindustry-level,isstrongerforthelargestandsmalleststocks,andisstrongerforgrowthstocksrelativetovaluestocks.Herdingbehaviourisalsomorepronouncedunderconditionsofdecliningmarkets.Overthesampleperiodweareexamining,herdingbehaviourdiminishesovertime.TheresultsprovidesomeindicationtotheeffectivenessofregulatoryreformsinChinaaimedatimprovinginformationefficiencyandmarketintegration.©2013ElsevierInc.Allrightsreserved.JELclassification:G14G15Keywords:InvestorherdingChinesestockmarketsMarketefficiency1.IntroductionUnderstandingthedecisionmakingprocessofvariousparticipantsinthemarkethasalwaysbeenachallengingmissionforacademicsandpractitioners.Conventionaltheoryofefficientmarketsassertsthatmarketsareinformationallyefficientandinvestorsformrationalexpectationsoffutureprices,andthatanynewinformationenteringintothemarketisinstantaneouslyincorporatedintoexpectedpricesinahomogenousmanner.However,theefficientmarkethypothesishasbeendisputedbothempiricallyandtheoretically,1anditsmajorshortcomingsinmodellingreal-lifesecurityreturnshavebeennotedbynumerouspastliterature(seee.g.,Shiller,1989;Summers,1986).Behaviouraleconomistshoweverhaveattributedtheimperfectionsinfinancialmarketstovariouscognitivebiases,humanerrorsandresponses.Herdingactivitiesamonginvestorshavebeenapopularbehaviouralexplanationfortheexcessvolatilityandshorttermtrendsobservedinfinancialmarkets.Investorherdingcausespricestodeviatefromfundamentalvaluesandcreateimplicationsfortradingstrategiesandassetpricingmodels,2thusithasreceivedgreatattentioninrecentyears.Humanherdingbehaviourusuallyresultsfromatendencytoimitatetheactionsofothers.ThedefinitionproposedbyChristieandHuang(1995,p31)is“individualswhosuppresstheirownbeliefsandbasetheirinvestmentdecisionssolelyonthecollectiveactionsofthemarket,evenwhentheydisagreewithitspredictions”.Onelineofresearchexplainsthepresenceofherdingbehaviouramongmarketparticipantsthroughinvestorpsychology,regardingherdingamonginvestorsasirrationalbehaviour.DevonowandWelch(1996),forexample,proposethatinvestorsdisregardtheirownbeliefsandfollowotherinvestorsblindlyduetoanintrinsicpreferenceforconformitywiththemarketconsensus.Pretcher(2001),ontheotherhand,seekstoexplainherdingbehaviourfromaneuroeconomicperspective.Hearguesthathumanherdingbehaviour,likeotherprimitiveinstinctsforInternationalReviewofEconomicsandFinance29(2014)12–29⁎Correspondingauthor.Tel.:[phone].E-mailaddresses:[e-mail](J.Yao),[e-mail](C.Ma),[e-mail](W.P.He).1Forexampleonitsinabilitytoexplainpersistentanomaliesinthemarket.2Forexample,whenoneinvestsinamarketwhereparticipantstendtoherdaroundthemarketconsensus,alargernumberofsecuritiesarerequiredtoachievethesamedegreeofdiversificationthaninaherd-freemarket.1059-0560/$–seefrontmatter©2013ElsevierInc.Allrightsreserved.:(2000)emphasizethedistinctionbetweenintentionalherding,whichresultsfromanobviousintentbyinvestorstoimitateothers,andspuriousherding,inwhichgroupsofinvestorsfacingsimilardecisionproblemsandinformationsetstakesimilardecisions.3Banerjee(1992)andBikhchandani,Hirshleifer,andWelch(1992)arguethatwhileindividualscannotaccessotherinvestors'privateinformation,suchinformationisrevealedthroughtheactionstakenbytheseinvestors.Byobservingpriorinvestors'actions,invest/rejectcascadescanoccurdependingwhetherthefirstfewinvestorsallchosetobuy/sell.Suchherdingexternalityresultsininefficientoutcomesandthecascadesarealsopath-dependentandidiosyncratic,easytoreversewhenmoreinstructivepublicinformationentersthemarket.Yang(2011)arguesthatherdbehaviourofinvestorsisinfluencedbytheprecisionofcostlyprivatesignalsandsignalextraction.Theevidenceofherdingbehaviouramongthemarketparticipantshasdirectimplicationtothemarketinform