Industry herding and market states: evidence from Chinese stock markets

Abstract

This paper uses firm-level data to examine whether investors follow each other into and out of the same industries in China’s A-share markets. Our study is a significant addition to the literature that investigates herding behaviour in an industry context with asymmetric herding effects with respect to different market states, different stock exchanges, and the role of the information technology sector. Using recent daily data from 17 May 2001 through 16 May 2011, we demonstrate strong evidence of industry herding in the A-share markets. Evidence further supports that stock return dispersions from the information technology sector play a significant role in explaining the other sectors’ herding activity. After examining bull and bear markets, herding is more profound in some sectors during a bull market. Finally, industry herding is more prevalent in the Shenzhen stock exchange, while for some sectors in the Shanghai stock exchange herding is more prevalent during a bull market state.

Keywords:

• Industry herding
• Stock return dispersions
• Bull and bear markets
• China
• Asymmetric behaviour

JEL classifications:

• G14
• G15

Acknowledgements

The authors appreciate the suggestions of the Editor and the anonymous referees who helped clarify some issues.

Notes

¹The US subprime crisis during 2007–2009 may have caused structural changes in the Chinese market, but it is beyond the scope of our research. However, we do consider possible structural changes in the bull and bear markets analysis.

²CCK’s measure of CSAD is derived from the conditional version of the CAPM, while our test for herding follows the method used by CH and Chiang and Zheng (2010), which does not require the estimation of beta. This avoids the possible specification error associated with a single factor of CAPM.

³CCK’s measure of CSAD is derived from the conditional version of the CAPM, while our test for herding follows the method used by CH and Chiang and Zheng (2010), which does not require the estimation of beta. This avoids the possible specification error associated with a single factor of CAPM.

⁴Four firms were deleted from our sample, due to missing data.

⁵For the sake of brevity, both tables for the SH and SZ exchanges are omitted, but are available upon request.