An Empirical Study Of Funds' Herding And Its Impact On Stock Prices

The behavior of institution plays an important part in the stability of stock market, which has great influence in the healthy development of market. An empirical study of funds'herding and its impact on stock price is conducted in this paper.Firstly, after a comprehensive analysis of empirical research results from home and abroad, three conceptions are introduced for the first time, which are the "frequency", "intensity" and "duration" of herd behavior. Secondly, "the duration of herd behavior" is taken into consideration when samples of herd behavior are being constructed. Then emphases are put on the study of "frequency and intensity of herd behavior", impacts of herd behavior on stock price. Finally related suggestions have been put forward.This article uses the detailed portfolio sample date of opened securities investment fund from 2003 to 2008, the results show that herd behavior is easily found in stock exchange. And herd behavior is more obvious when circulated stock value is between 10-40 billion RMB. While it is more intensive when circulated stock value is below 40 billion RMB. Between buy-herding behavior and sell-herding behavior, herd behavior is more obvious and intensive in the former. Herd behavior has an impact on present stock return, buy-herding behavior lead to the positive abnormal return, and sell-herding behavior results negative abnormal return. In the long run, buy-herding behavior could move stock prices toward, rather than away from, the equilibrium value of stocks, while sell-herding behavior could destabilize stock prices.Meanwhile, this paper finds that investment fund may not only adopt positive feedback trading strategy, but also negative feedback trading strategy. On the one hand, positive feedback trading strategy is applied in the previous high-returned stock; while negative feedback trading strategy in the extreme high-returned stock.According to the results of this research, two suggestions are proposed:first, further perfect disclosure of information, and better supervise the disclosure of information of small company. Second, further perfect trading mechanism and implement the short selling mechanism in our stock market at appropriate time.