Herd Behavior Of Chinese Institutional Investors And The Stock Return

This paper examines the existence and transaction characteristics of the herd behavior of institutional investors in China,as well as the abnormal return of the herding portfolio.A total of seven categories of instit utional investors' heavyweight shareholding changing data are collected,which are mutual funds,qualified foreign institutional investors(QFII),securities companies(brokers),insurance companies,social security funds,trust companies and annuity plans.The time span is from the first quarter of 2005 to the fourth quarter of 2016,for a total of 48 quarters.In this paper,the modified LSV method is used to calculate the herd behavior index.Firstly,the results show that there are serious herd behavior s in Chinese institutional investors,and the buying herding effect is stronger than that of the selling herding.The degree of herd behavior of different institutional investors is different,and the fund's herding effect is weaker than other institutions.After comparing the market value of stocks traded by different institutions,it is found that mutual funds prefer stocks with large market value.As an important part of pension insurance,social security and annuities prefer stocks with smallest market value.After examining market value preference of different time period of institutional investors,it was found that in the early stage of the sample period,institutional investors paid more attention to large-cap stocks,but over time,small-cap stocks also received attention from institutional investors.Secondly,after grouping companies according to market value,it is found that institutional investors are more likely to herd when investing in small-cap stocks.This may be due to the incomplete discl osure of information by small companies,which makes it easy for investors to observe and imitate other investors when trading.After grouping stocks according to the revenues in the previous quarter,institutional investors have generally adopted a negati ve feedback trading strategy,that is,buying stocks that have not performed well in the past and selling stocks that have performed well in the past.This echoes the "reverse effect" of Chinese stock market as a whole.In the market where the reversal eff ect is stronger than the momentum effect,the negative feedback trading strategy will help the institution to obtain positive returns.Then,the samples are further divided into the buying herding portfolio(BHM)and the selling herding portfolio(SHM),an d each portfolio is divided into five groups according to the size of the herd effect.Also,we build some hedging portfolios to see whether we can get some abnormal return and quarterly Fama-French three factors are constructed to examine the abnormal ret urns of these portfolios.The results show that the hedged portfolio will produce significantly positive abnormal return in the current trading period,but after one year,the abnormal return will reverse and become negative.It shows that the herd behavio r of institutional investors in China is more of an irrational blind follow-up caused by behavioral factors,which is not based on the analysis of effective information.After dividing the investors into active traders and negative traders,it was found th at the active trader was able to obtain a higher abnormal return in the current trading period,and achieved a relatively small income reversal after one year,while the passive trader shows more serious irrationality,and passive management also makes the m less profitable in the current period of trading.