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Mutual Fund Herd Behavior And The Impact On Stock Market

Posted on:2005-04-29Degree:MasterType:Thesis
Country:ChinaCandidate:F WangFull Text:PDF
GTID:2156360122999496Subject:Finance
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Herd behavior in financial market is a kind of collective behavior. When investors decide to imitate the observed decisions of others in the market rather than follow their own beliefs and information, herd behavior arises. The performance of herd behavior is that a group of investors trading in the same direction over a period of time.There are several potential reasons for herd behavior in financial markets. The most important of these are imperfect information, concern for reputation, and compensation structures. Herd behavior is believed to be an important factor to cause market instability. For this reason, herd behavior receives the concerns of the government and academia.Studies of herd behavior on Chinese financial market Concentrate primarily to whether there exists herd behavior or not in the whole stock market. In this paper, we analyze the trading of the mutual funds to determine whether there exists herd behavior when they trade stocks and to investigate the impact of herding on stock market.This paper is composed of five sections.The first section is preface, which consists of the behavior pattern of the investor in Chinese stock market, the development of the mutual fund, and the research approach of this paper.The second section is the theory summarization of herd behavior, which includes the empirical studies on financial market. There are three popular theories explaining why institutional investors might trade together. First, information-based herding and cascades. Second, reputation-based herding. Third, compensation-based herding. The third section is an empirical study on Chinese stock market. To measure herd behavior, we begin with the quarterly equity holdings of virtually all mutual funds existing between January 1999 and September 2003. We apply the measure of herd behavior proposed by Lakonishok et al. (1992), which examines the proportion of funds trading a given stock that are buyers. Funds are considered to exhibit herd behavior if stocks tend to have large imbalances between the number of buyers and sellers.The results show significant levels of herd behavior by mutual funds. Mutual funds tend to sell stocks in herds much more frequently than they buy in herds, but growth-oriented funds do not show a greater tendency to herd than income-oriented funds. We find the evidence that abnormal stock returns are related to the direction of herding. The permanent impact indicates that funds trading reflect information and increases the speed of stock price adjustments. The fourth section describes the reason why mutual funds participate in herd behavior from five respects, which combine the existing theory model and reality of China. First, defect of principal-agent relationship make some money managers tend towards choosing the investment tactics that follow the manager of other investment funds. Second, Chinese stock market is not perfect, which limit the investment behavior of the fund. The fund is unable to form and adhere to the investment style, can only seek the market focus, which make a lot of funds buy and sell the same stock at the same time. Third, the Blame Sharing Effects and manager's concern to the job career of fund cause herd behavior. Fourth, high information cost encourage money managers obtain information by observing other managers, which will lead to herd behavior. Fifth, fund investment style lack constant and continuity, cause most funds lose style of investing finallyThe fifth section analyses the impact of herd behavior on Chinese stock market, and make a proposal to lighten the negative effect of herd behavior.There are two respects in positive influences. First, herd can guide correct value judgment between the organization investor; Second, herd behavior that is due to the medium and long-term investment tactics can decrease market fluctuation. There are three respects in negative influences, first, herd behavior may propagate the wrong information, cause the turbulence of the securities market. Second, herd behavior that is...
Keywords/Search Tags:Behavior
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