This study examines herding behavior in dual-listed Chinese A-share and B-share stocks. We find evidence of herding within both the Shanghai and Shenzhen A-share markets that are dominated by domestic individual investors, and also within both B-share markets, in which foreign institutional investors are the main participants. Herding occurs in both rising and falling market conditions. Herding behavior by A-share investors in the Shanghai market is more pronounced under conditions of rising markets, high trading volume, and high volatility, while no asymmetry is apparent in the B-share market.
Herding in financial markets has been typically described as a behavioral tendency for an investor to follow the actions of others. Practitioners are interested in whether herding exists, because the reliance on collective information rather than private information may cause prices to deviate from fundamental value and present profitable trading opportunities. Herding has also attracted the attention of academic researchers, because the associated behavioral effects on stock price movements may affect their risk and return characteristics and thus have implications for asset pricing models.
Theoretical models of herding behavior have been developed by Bikhchandani et al. (1992), Scharfstein and Stein (1990), and Devenow and Welch (1996). Empirical studies have mainly focused on detecting the existence of herding behavior among mutual fund managers (Lakonishok et al., 1992 and Wermers, 1999) or financial analysts (Trueman, 1994, Graham, 1999, Welch, 2000, Hong et al., 2000, Gleason and Lee, 2003 and Clement and Tse, 2005).
The Chinese stock market provides an interesting setting for the analysis of investor herding behavior. Since the establishment of the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) in December 1990, two classes of shares have been issued. A shares can be purchased and traded only by domestic (Chinese) investors and are denominated in the local currency, the Renminbi (RMB). B shares were sold only to foreign investors before February 2001, and have been sold to both foreign and domestic investors since then. A shares and B shares are traded simultaneously on the Shanghai and Shenzhen stock markets. However, the characteristics of their investors are very different. The A-share market is dominated by domestic individual investors (China Securities and Futures Statistical Yearbook, 2004), who typically lack significant knowledge and experience in investments. In contrast, the B-share market is dominated by foreign institutional investors, who tend to be more knowledgeable and sophisticated than A-share investors. The different characteristics of A-share and B-share investors may result in differences in the level of herding in each market.
In this study, we examine whether herding behavior exists within each of the Chinese stock markets, whether it exists across A-share and B-share markets, and whether it exists across the Shanghai and Shenzhen markets. For markets characterized by herding behavior, we further examine whether herding exhibits asymmetric effects associated with market returns, trading volume, and return volatility. Our results indicate that dual-listed Chinese A and B shares exhibit significant herding behavior. Herding by A-share investors in the Shanghai market displays strong asymmetric characteristics: it is higher during periods of rising stock markets, high trading volume, and high market volatility. We find no evidence of asymmetric effects in the herding behavior of B-share investors. Although herding occurs within each of the markets examined, we find no evidence of information across markets affects the dispersion in returns.
The remainder of this paper is organized as follows. Section 2 presents the methodology used to detect herding behavior. Section 3 describes data. Section 4 reports evidence of herding behavior within each market. Section 5 studies the asymmetric effects of herding in response to market conditions, trading volume, and return volatility. Section 6 examines the effects of cross-market information on herding. Section 7 concludes the paper.
This study examines the existence of herding behavior in dual-listed Chinese A- and B-share
markets. Results based on daily data indicate that both the A-share and the B-share markets on the
Shanghai and Shenzhen exchanges are characterized by investor herding. The evidence of
herding over weekly and monthly time intervals is much weaker, suggesting that herding is a
phenomenon confined to short time horizons.We test for potential asymmetries in herd behav
ior related to market returns, trading volume,
and volatility. Herding is present in all four ma
rkets examined when markets are rising, and
when volume and volatility are high. The herding behavior of Shanghai A-share exhibits
asymmetric tendencies, and is si
gnificantly stronger when mark
ets are rising, experiencing
higher trading volume, and more volatile. We find no such asymmetries for B-share investors.
This apparent difference in investor behavior ma
y be due to the different characteristics of A and
B markets: the A-share market is dominated by dom
estic individual investors, whereas the B-
share market is dominated by fo
reign institutional investors
. In future research on Chinese
equity markets, the consideration of investor characteristics and behavioral tendencies may
yield interesting insights
