An Empirical Analysis Of Herd Behavior In China’s Stock Index Futures And Spot Markets

Asian financial crisis in1998had deeply influenced the financial markets, andafter nine years, in2008, the U.S. housing loan triggered the global financial crisis.And systematic bias caused by herd behavior can often trigger market bubbles andmarket frenzy, eventually leading to the outbreak of the crisis, and inefficient herdbehavior can quickly spread crisis to other capital markets.Certainly,The financialcrisis means "danger" and "opportunity", and the "crisis" is always followed by"opportunity". In the post-crisis era with opportunity, the market will be re-energized,a new round of bullish trend will also be formed. If policies of government are not inappropriate or excessive, or the self-healing of market delay or investment behavior ofinvestors do not get proper guidance, the market recovery period may be very long orusher in a new boom and slump.During the four years from the financial crisis of2008to2012, Chinesegovernment adjusted interest rates for11times, in which benchmark interest rate wasadjusted for five times to make adjustments on the investment behavior in the market.Until April16,2010, market also gave birth to the share price index futures. With thegradual development of the market, risk aversion function of share price index futures,the role of price discovery function, hedging, arbitrage mechanisms also graduallyplay their effective roles. However, whether the adjusting and improving function ofthe interest rate and share price index futures on the capital markets changes theinvestors’ herd behavior? Whether the herd behaviors of investors between futuresand spot have a mutual impact? These questions in the condition of the post-crisis eraare exactly proposed in this paper.Based on previous studies, this paper uses CCK model-based integrating with thecentral bank’s benchmark interest rate demand which is an adjustment factor, as theherd behavior model. According to the comparative value of yields and interest rates,the market is divided as "optimistic investment market","pending investment market"and "down market ". This paper selects index futures contract from April16,2010toOctober15,2013, and149main constituents of Shanghai and Shenzhen300Indexfrom April16,2008to October15,2013as the research objects. This research also uses the daily closing price of149stocks and the four contracts as the sample data.Then this paper analyzes the whole herd behavior in share price index futures and spotmarket; and analyzes how the adjustment of interest rates and the introduction ofshare price index futures effect the changes in herd behavior; finally, analyzes thefeedback strengthening function of herd behavior between share price index futuresand spot markets through Granger-causality relation test.Based on the analysis of combining empirical reality model and actual situation,this paper draws some practical results: Firstly, after the introduction of share priceindex futures in the overall market," optimistic investment market " exhibits a slightinsignificant herd behavior, affected by the financial crisis, while the stock marketindex shows a significant herd behavior in" optimistic investment market " during thefive and a half years of the sample. Secondly, when there is economic fluctuation, theadjustment of interest rate policy makes a corresponding change in herd behavior ofinvestors in the share price index futures market, even weakens the role of investors’herd behavior. Thirdly, after the introduction of share price index futures, herdbehavior in stock index market also changes, and the herd behavior which existedbefore the introduction of share price index futures gradually disappears; theintroduction of stock index futures played a guiding role for investors’ investmentbehavior in the stock market, and spreads the risk of the spot market, stables thedevelopment of spot market. Finally, since the share price index futures contract ofthe month should eventually converge with the spot price, investors of share priceindex futures need to analyze and judge the recent invest behavior of stock spotmarket and the price trend to make the best trading strategies, which shows the spotmarket index has the role of strengthening feedback for herding behavior in stockindex futures market. However, there is no clear evidence that the herd behavior inshare price index futures market has the same function on the herd behavior in stockspot market.Combining the empirical results, the paper makes some constructive suggestionsfrom the government, the market and investors. Including that national governmentsshould do the supervision, care for the capital markets in the future, make strict rulesand regulations and implement prudent regulatory policies; market should enhancetheir self-binding, carry out good publicity and education, enrich investment products,improve the investment structure and improve the information disclosure system;investors should have the expertise and Improve the psychological quality, conductrational analysis and do the Pareto Optimality in the investment. Lastly, this paper hopes that these suggestions can make the investment behavior of investors becomemore reasonable so that the herd behavior in the capital market can be gradualweakened, which will also become a valuable reference in the process of China’scapital markets being matured and improved.