An Examination Of The Herd Behavior In Chinese Stock Market

In this paper, we will investigate a type of herding in whichinvestors suppress their own beliefs and base their investmentdecisions solely on the collective actions of the market, even whenthey disagree with its predictions. Under this premise, investors areexposed to the unpredictable whims of herds and may be forced totransact at inefficient prices. Herd behavior is one of the irrationalactions in financial market. It has negative effects on the utilities ofinvestors and the stability of the whole market. The existence ofherd behavior among specific participants in financial markets hasbeen analyzed empirically in a number of foreign studies. InChinese Stock market, some scholar researched the herd behaviorabout the market mainly before 2003 and found herd behavior thatmore significant than American Stock market.But there are only some brief introductions for the theoreticanalysis about herd behavior. It is too simple to have a lucidcomprehension. In addition, most empirical studies have focusedon examining the existence of herding in fund market behavior. Asfor the aggregate market, most study focused on the period before2003, resort to CSSD (cross-sectional standard deviation) or CSAD(cross-sectional absolute deviation). But sometimes it is limited forthe swatch of CSSD and the time period is too short for CSAD togive a long-range test. So this paper gives a general introductionabout herd behavior: Chapter 1 introduces the provenance anddefinition of herd behavior, and different definitions between "realherd behavior" and "illusive herd behavior". Chapter 2 presentssome theory models that cause herding and give the endogeneticprinciple of collective decision. Chapter 3 introduces somemeasures to examine herd behavior in fund market and stockmarket, and give an introduction for the empirical work of foreignscholar. Chapter 4 employs three empirical models to test the herdbehavior of Shenzhen & Shanghai stock market. We find that the Ashare in Shenzhen & Shanghai stock market has the herd behaviorbefore 2001, but it is not statistically significant in recent years.Finally, we provide some possible reasons that may cause the herdbehavior in Chinese stock market and give some significantstrategies for investors.