The Research On The Herding Behavior Of Chinese Equity Open-ended Funds

In nature, animals such as cows and sheers tend to follow each other. It is called herding behavior. It can also describe the phenomenon in the capital market that the strategies adopted by investors may be influenced by others, omitting their own effective and valuable information and mocking other counterparts vividly and precisely. In the capital market, herding is an irrational phenomenon that caused by individuals. And spurious Herding refers to the reaction based on the same information set. The research on the herd behavior in the capital market could trace to John Keynes. He concluded that the investing tips were just like guessing who would be the champion in a beauty contest. In this situation, you would win the big prize, as long as you know exactly the voting behavior of others. Over centuries, people have paid much attention on the herd behavior in the capital market. No matter Bikhchandani’s informational cascade or Maug’s compensation-based model, they all successfully explain how the herding behavior formed in the market.Compared to the theoretical research, the empirical study on herding started later, but developed much faster. Lakonishok etc. first created a method to measure the herd behavior in 1992, and it is still used widely now. Wermers proposed a way to testify the herding based both on the trading direction and volume in 1999. It is called portfolio-change-method. In 2004, Sias propose an alternative herding measure that quantifies the degree to which investors follow other investors’trades in adjacent periods. Another important research respect is testifying whether there exists herding in the whole market. In 1995, William and Roger measured the herding of the market using the market return dispersion. And Chistie and Huang proposed a method using the cross sectional standard division of stock returns in the same year, called CH model. Chang, Cheng and Khorana improved it with measuring the stock returns dispersion using cross sectional absolute division, named CCK model. Numbers of empirical studies has proved that there is no herding in the stock market of United States, but the institutional investors do herd in the stock market. In 2009, Gokhan Sonaer from Virginia Tech studied the herding behavior of American mutual funds by active management. The results suggested that mutual fund has obvious herd behavior in industries. However, the herding wouldn’t destroy the fundamental value of the industry.Chinese security market started late, as an emerging market, the herding behavior happens more often in our country. In 2001, Song Jun and Wu Chongfeng first testified whether Chinese stock market existed herding behavior, using the CH method. Sun Peiyuan and Si Donghui improved the former research by using the CCK method. The empirical research suggested that domestic stock market herded a lot in the environment of asymmetric information and government intervention. Since then, domestic scholars testify the herding of the whole market and institutional investors, using the LSV, PCM, CH and CCK method. The results proved that both the stock market and institutional investors have obvious herding behavior.In this article we review domestic research on the herding behavior in recent years, but finding no study of herding behavior in industries. Therefore, we will take the quarterly data published by the fund management company from 2002 to 2010 in the CSMAR as sample and testify whether equity open-ended funds herd in industries. The research suggests that the funds do cause herding in industries, and the herding would get weaker as more equity funds getting trading in the industry. Besides, the buying herding is obviously stronger than the selling herding caused by the equity funds in our country. By testing the relationship between the other manufacturing industries and the manufacturing index, we find no evidence that equity funds would herd more when the index is going down.Finally, combined with the empirical research results and the status of the fund industry in our country, I propose some suggestions, containing how to weaken the herding of funds and promote the development of domestic capital market stably.In a word, we have done some innovation in this article. First, after reviewing domestic researches about herding behavior in the last decade, we find that they mainly considered the herding behavior of the whole stock market or whether the security funds would herd on the individual stocks. In this article, we study the herding behavior of equity open-ended funds based on the industries. Second, in this article we use the quarterly-industry analysis, and identify a fund as a net buyer or a net seller, according to the market value changed hold by the fund in a particular industry. It can make up for the deficiencies of LSV method.However, there are still some deficiencies in this article. Our empirical research results suggest that equity open-ended funds herd significantly in our country. We could study the relationship of the herding behavior and the industry characteristics, such as historical returns and degree of volatility of returns etc. And the relationship between the herding behavior and funds’investment performance should also be considered. These are what we could do in the follow-up research.