Examining the herding behavior in Chinese Stock Market

Herding behaviour is the elusive phenomena. It means collective actions behaved by individuals under uncertain conditions (Adler and Adler 1984). Whereas the current financial market has an important character which is its uncertainty and fuzziness. Hence, investors sometimes have conformity in mind. This has already illuminated in the earlier economic theory. Keynes (1936) reckons that long-term investors probably are not willing to make decision based on their private information and own opinions because they want to avoid being considered as imprudence and not tallying with conventionality. As he mentioned in this paper, that the failure according with tradition can bring more benefits to reputation than success which is not according with tradition. In the stock market, when investors trade with similar stocks, herding behaviour takes place. Besides, fund investors in the stock market, for instance, mutual funds, tends to have herding behaviour easier than individual investors theoretically. The reason is fund investors are able to receive much high quality information than individual investors. They follow one another; eventually cause herding behaviour (Lakonisok et al 1992). Herding behaviour will affect the stock price, driving stock prices away or closer to the intrinsic value. Both rational and irrational herding behaviour will lead to wrong or warp estimation of asset value. In addition, herding behaviour can be used to explain many phenomena such as stock price over-fluctuation, collapse of stock market and speculative bubbles etc. Therefore, researches on herding behaviour will bring credit to the investors and market controllers both theoretically and empirically. Empirical analysis indicates that due to frequently government interfere and serious information asymmetry, herding behaviour exists in the Chinese Stock market when market is fluctuating in the extreme market condition (i.e. bull market and bear market). Especially when the market is advancing, herding behaviour tends to be much obvious. This reflects that investors in China tend to behaviour in the similar way when the market is in good condition rather than in bad condition