An Empirical Study On Rational And Irrational Factors Of Herd Behavior In Chinese Market

In this paper, the momentum/reversal fixed excess return is defined as the proxy variable of investors’ exchange habit which means rational herding, and investor sentiment is defined as the proxy variable of irrational herding, with CCK and HS methods to analyze the herd behavior of100constituent stocks of SME index in Shenzhen stock market.The results show that exchange habit as rational factor and investor sentiment as irrational factor play a significant role towards herd behavior.With the strong empirical evidences, we propose a new model based on Carhart Four-Factor Model with reversal factor and beta herding at the last part of empirical analysis. The new model can almost completely explain the excess return of samples, and it might be a better model for capital pricing than the Four-Factor.