Empirical Research On Herding Behavior In Chinese Stock Market

Traditional finance theory is based on efficient market hypothesis, while empirical research in these years found that there is seriously irrational behavior in stock markets. Behavioral finance becomes a new hot topic, and herding behavior is a typical case. In our study herding measures the behavior of investors who simply follow the performance of specific factors such as the market portfolio itself or particular sectors ,styles ,or macroeconomic signals, and hence buy or sell individual assets at the same time disregarding the risk-return relationship.A serious problem in the past researches on herding behavior in stock market is that it fails to distinguish genuine herding from pseudo herding. Thus we use a sample of stock returns from Jan, 2001 to Sep, 2008 and a new market herding index in terms of CAPM model proposed by Hwang and Salmon to detect genuine herding in Chinese stock market, which deletes the influence of information of individual stock and market–wide. And also we detect the contribution of sentiment to herding in Chinese stock market.The empirical is conducted, and it is found out that herding behavior exists in both bull market and bear market. And it is obvious when the market is in extreme volatility, especially with a bull market, when investors tend to chase rising stocks. We also found out that sentiment contributes a lot to herding in Chinese stock market. According to the results, several suggestions are proposed to avoid herding.The main innovation of this paper is that it selects new data, makes the demonstration analysis by a new test method to detect herding in Chinese stock market which can better distinguish genuine herding from pseudo herding than previous methods. And also we detect the contribution of sentiment to herding in Chinese stock market.