Research On Herd Behavior Of The Closed Investment Funds In China

According to efficient market hypothesis (EMH), security market is efficient and stock prices can reflect changed information fully. However, in the last twenty years plenty of empirical researches presented that there are many phenomena in opposition to EMH in the financial market. Herd behavior is one of the phenomena, which refers to the investing behavior of investors.Herd behavior in financial markets means that the decision-making of participators doesn't depend on the information explored by themselves, but on public information excessively. That is to say, participators imitate the investing behaviors of other participators and adopt the same investment strategies with others. Investment funds play a very important role in security market. If they imitate each other and buy in or sell out the same stock simultaneously, the stable operation of the market will be disturbed. The purpose of this paper is to find out whether herd behavior exists in investment funds in China security market. The result shows that herd behavior does exist, and then the factors affecting the herd behavior are analyzed.Firstly, some basic theories about head behavior are introduced, including DSSW model, Information Cascades model, and herd behavior based on reputation. Secondly, empirical methods, which are used to test herd behavior, are discussed. Then advantages and disadvantages of these methods are pointed out. Thirdly, method of Wermers and Lakonishok, which is modified and expanded, is adopted to test herd behavior of Chinese closed funds. It finds that herd behavior of Chinese closed funds is more serious than that of American mutual funds and comparing with Shenzhen stock market, herd behavior is more serious in Shanghai stock market. Fourthly, the factors affecting the herd behavior are analyzed by the method of Structural Equation Modeling (SEM). Conclusions are drawn that the herd behavior of Chinese closed funds is more serious in small-capitalization stocks. The investment strategy of funds is a mixed strategy: investment funds take momentum strategy when they buy stocks in, and they take contrarian strategy when they sell them out. Finally, in order to alleviate negative effect of herd behavior, some suggestions are put forward.