On The Herd Behavior In Securities Market

Modern Financial Theory (MFT) is facing more and more challenges after its resplendence, and among them is herding of stock market traders. It looks as if herding is a very "little" concept at the first glance; yet actually it takes effect on the real security trader behavior and the stock market function generally and deeply.The theory foundation and empirical study of MFT are analyzed thoroughly and synthetically at the beginning of the article. We conclude that MFT has its serious limitation, and then the theory space is opened for the presence of the herd behavior.Secondly, Herding is classified and analyzed thoroughly for the first time in this article, and it's also the greatest attribution of this article. From the perspective of Information Economics, herding can be divided into three types: herding based on payoff externality, herding based on information externality and unintentional herding. Thereinto, noise-trading herding arises when herding is caused by noise. They're all called rational herding because the mechanisms of their occurrences are rational. From the perspective of Behavioral Finance, herding is irrational due to security trader's mind and cognizance error. We consider that herding is a mixed product of reason and unreason and reason is the dominant. Only in a few cases can it fully be the result of unreason. Moreover, herd is the mostly caused by information externality, and it's also criticized intensely, so we use mathematics model to prove its robustness; Empirical test is used to analyzed stock investment funds in China, and shows that herd behavior is commonly seen in their trading and enlarges price fluctuation.Next, we study the different means to all the participants in the stock market brought by herd behavior. It can be utilized sometimes but need be weakened at most occasions. It's very clear that only herding of security trader be reduced can the stock market absorb more sufficient information and benefit the whole society better.The conclusion and prospect of herd behavior are placed at the end of the article. We think that herd behavior can only be weakened but not eliminated mostly because the information externality exists forever. Otherwise, there are more way to advance in the theory and empirical study of herd behavior.