Industry Herding And Contrarian Strategy

There are momentum effect and Contrarian Effect in stock market,which have been verified in many countries and markets.The reasons for momentum effect and contrarian effect can be explained by behavioral finance.Herd behavior is the content of behavioral finance,and herding behavior among investors also has an impact on stock market.This paper tries to explore the influence of herd behavior on the contrarian effect in Chinese stock market through the study of Chinese stock market.This paper evaluates the impact of industry herding on return momentum.While the findings support that loser industries outperform winner industries in subsequent months,we find that the profitability of industry contrarian strategies depends on the level of herding in an industry.Loser industries with high level of herding yield significantly lower subsequent returns than loser industries with low level of herding while no significant difference in subsequent returns is observed for winner industries across low and high herding levels.The asymmetry in the relationship between herding and contrarian returns is in fact the driving factor behind profitable,zero-cost contrarian strategies and suggests that the level of herding in an industry must be considered in the implementation of industry contrarian strategies.These findings clearly suggest that fund managers must take into account the level of herding in winner and loser industry portfolios and that the asymmetric relationship between herding and contrarian returns can be explored for enhanced contrarian strategies that can outperform plain-vanilla contrarian strategies.The findings have important implications for the implementation of zero-cost contrarian strategies and clearly suggest that the level of herding in an industry must be considered in contrarian strategies.