Herding behaviour in asymmetric and extreme situations: the case of China

Abstract

This paper will investigate herding behaviour in asymmetric (bearish versus bullish context) and extreme market conditions (characterized by significant changes in stock prices) through daily data from the Shanghai and Shenzhen stock exchange markets. Results show that a bullish context generates a herding behaviour for B-shares while a bearish situation rather favours a crowd movement for A-shares. Given that sophisticated investors are known to trade on B-shares, these results suggest that this category of actors is more likely to follow the trend when they face with a bullish context while they can reduce their herding behaviour in a bearish context by using technical/analytical tools allowing them not to follow the crowd behaviour.

Keywords:

• herding behaviour
• Chinese stock markets
• asymmetric behaviour

JEL Classification:

• G15
• G14

Notes

¹ These companies have been carefully selected by using two criteria: the necessity to adjust companies in the same date format meaning that we did not deal with companies which suspended trading and the second criterion referred to the importance of capitalization of firms. Selected companies are the most-capitalized companies on both markets. Data have been collected from China Stock Market Trading Database (CSMAR) (http://www.gtadata.com/) and Bloomberg Database.

² The choice of working with daily returns is consistent with Christie and Huang (1995) or Tan et al. (2008) who showed that herd formation is a short-lived behaviour. The daily return is calculated by the equation: *100, donates the closing price of firm i on time t.

³ Lao and Singh (2011) used 1%, 5% and 10% criteriaof extreme market conditions and also detect significant herding formation in Shanghai A-shares during the period 1 July 1999 to 1 June 2009.

⁴ Investment practices are a professional activity for sophisticated investors who tend to be suspicious with large fluctuations on the markets while inexperienced investors rather consider large variations as a potential way of making money quickly (and then maybe leave the market) (see Gervais and Terrance, 2001 for further details on that point).