Industry Herding Of Mutual Funds In China

In this paper, we mainly focus on examining the industry herding behavior ofequity investing mutual funds in the Chinese market by testing the averagecross-sectional correlation between the industry buy ratios and their lags. The dataused are the stock holdings in22industries of equity investing mutual funds in Chinafrom2002to2013with semi-annual frequency. Our empirical result reveals that theaverage cross-sectional correlation on the whole time span is0.08, of which0.12iscontributed by the industry herding behavior while the other-0.04suggestsself-turnover. Although the findings on the whole time span is not significantcompared to the result in the US market, we identify that before the year2007, theaverage cross-sectional correlation attributed to the industry herding behavior is0.35,which is significantly positive and significantly different from the measurement afterthe year2007. After ensuring the robustness of our results, we conduct tests for theunderlying reasons and provide three explanations for the above phenomenonsummarized in two dimensions:1) the turnover rate of Chinese equity investingmutual funds is high compared to that in the US market (horizontal dimension);2) theabilities of mutual fund managers in selecting industries has been enhanced in recentyears (vertical dimension);3) herded stocks are more widely scattered into industriesin recent years than in early years (vertical dimension).