What Explains Herd Behavior in the Chinese Stock Market?

Abstract

This paper examines the causes of herd behavior in the Chinese stock market. Using the non-linear model of Chang, Cheng and Khorana (2000), we find robust evidence of herding in both the up and down markets. We contribute to the existing literature by exploring the underlying reasons for herding in China. It is shown that analyst recommendation, short-term investor horizon, and risk are the principal causes of herding. However, we cannot find evidence that relates herding to firm size, nor can we detect significant differences in herding between state-owned enterprises (SOE) and non-SOEs.

Keywords: A-Share Market, Herd Behavior, Return Dispersion, Systemic Risk

JEL Classification: G15