China Securities Investment Funds Herd Behavior And Positive Feedback Trading Empirical Research

Herding is one of Behavior Finance's foci. Many scholars show strong interest in it, make some concrete study of it and present several practical theories. Firstly the paper makes a full review of most of the herding papers existed from four aspects: Payoff Externality, Principal-agent model, Information Cascades model and Empirical Herding. Then it suggests some directions for further study in the future and points out that the herding theories are of realistic significance to Chinese stock market.Secondly, based on the investment specifics in every fund's 4 semiannual and annual announcements from 2000 to 2001 as data, this paper adopts the testing method of Lakonishok et al(1992)and make an empirical test of Chinese security funds' herding behavior. It finds that Chinese security funds' herding effect is more significant than American mutual funds'. Chinese security funds show no bias to the large-capitalization, small-capitalization, newly-listed and IT stocks. The investment focus of Chinese security funds has changed from the small-capitalization to the large-capitalization stocks, which is beneficial to the stability of the stock market.Thirdly, compared to the results above and based on the same data and testing method, this paper makes an more practical extension of the assumptions, an empirical test of Chinese security funds' herding behavior and achieves some different conclusions. Chinese security funds' herding is more significant on the only-buy side than American mutual funds' corresponding herding while Chinese security funds' herding on the two other sides is less significant than American mutual funds' buy herding. Chinese security funds flock into the large-capitalization stocks, small-capitalization stocks, IT stocks and newly-listed stocks on the only-buy side while not on the two other sides. The investment focus of Chinese security funds was in the medium- and large-capitalization stocks, which is beneficial to the stability of the stock market. The fund investment is highly related with the market trend.Finally, in order to study the feedback trading by Chinese security funds, this paper researches the relationship between herding in formation period and the abnormal returns one quarter, half year and one year before the formation period and during the formation period. Chinese security funds use the feedback trading strategy to some extent. The higher the herding in the formation period is, the higher the abnormal returns one quarter, half year and one year before the formation period andduring the formation period are, vice versa. On the whole, herding is beneficial to stabilizing the stock market during these two years. Chinese security funds document a higher herding than American mutual funds in some trade, especially on the buy side. On other sides, it is not the case. They implement the feedback trading strategy to some extent. Their trading is highly related with the market trend.