Mutual fund herding behavior and investment strategies in Chinese stock market
-
DOIhttp://dx.doi.org/10.21511/imfi.15(2).2018.08
-
Article InfoVolume 15 2018, Issue #2, pp. 87-95
- Cited by
- 1261 Views
-
407 Downloads
This work is licensed under a
Creative Commons Attribution-NonCommercial 4.0 International License
This investigation studies the impact of mutual fund herding on the returns achieved by contrarian strategy from 1990 to 2015 in the Chinese stock market. The relationship between the profit gained by the contrarian strategy and the macroeconomic environment is also examined. First, the returns of the contrarian strategy in China’s stock market are found to be significant. Second, most loser stocks with a high degree of mutual fund herding outperform loser stocks with a low degree of mutual fund herding, revealing that the profitability of an investment portfolio depends on the degree of mutual fund herding. Third, investors should buy loser stocks with a high degree of herding and sell winner stocks with a low degree of herding during a two-year formation period, over which zero-cost contrarian strategies yield the significantly highest return. Finally, the payoff of contrarian strategies is positively related to the herding effect and negatively related to macroeconomic variables.
- Keywords
-
JEL Classification (Paper profile tab)G11, G23
-
References20
-
Tables5
-
Figures0
-
- Table 1. Descriptive statistics
- Table 2. Contrarian strategy
- Table 3. Effect of degree of herding on return of investment portfolio
- Table 4. Zero-cost portfolios
- Table 5. The impact of herding and macroeconomic indicator on returns of contrarian strategies
-
- Bondt, W. F. M., & Thaler, R. (1985). Does the Stock Market Overreact? The Journal of Finance, 40(3), 793-805.
- Chang, E. C., Cheng, J. W., & Khorana, A. (2000). An Examination of Herd Behavior in Equity Markets: An International Perspective. Journal of Banking & Finance, 24(10), 1651-1679.
- Chao, M., & Wu, C. F. (2004). Tests of Contrarian Strategy Evidence from the Chinese Stock Market. Systems Engineering-theory & Practice, 1, 30-34.
- Cheema, M. A., & Nartea, G. V. (2014). Momentum returns and information uncertainty: Evidence from China. Pacific-Basin Finance Journal, 30, 173-188.
- Chordia, T., & Shivakumar, L. (2002). Momentum, Business Cycle, and Time-varying. The Journal of Finance, 57, 985-1019.
- Christie, W. G., & Huang, R. D. (1995). Following the Pied Piper: Do Individual Returns Herd around the Market? Financial Analysts Journal, 51, 31-37.
- Demirer, R., Lien, D., & Zhang, H. (2015). Industry Herding and Momentum Strategies. Pacific- Basin Finance Journal, 32, 95-110.
- Grinblatt, M., & Moskowitz, T. J. (1999). Do Industries Explain Momentum? The Journal of Finance, LIV, 1249-1290.
- Hu, W. S., & Lu, C. R. (2010). Investment Returns from Applying Contrarian Strategies to America Commodity Futures. Paper presented at the 85th WEA Annual Conference, Oregon, United States of America.
- Hung, W., Lu, C. C., & Lee, C. F. (2010). Mutual Fund Herding its Impact on Stock Returns: Evidence from the Taiwan Stock Market. Pacific-Basin Finance Journal, 18, 477-493.
- Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers Implications for Stock Market Efficiency. The Journal of Finance, 48, 65-91.
- Kang, J., Liu, M.-H., & Ni, S. X. (2002). Contrarian and Momentum Strategies in the China Stock Market: 1993–2000. Pacific- Basin Finance Journal, 10, 243-265.
- Lakonishok, J., Shleifer, A., & Vishny, R. W. (1992). The Impact of Institutional Trading on Stock Prices. Journal of Financial Economics, 32, 23-43.
- Lakonishok, J., Shleifer, A., & Vishny, R. W. (1994). Contrarian Investment, Extrapolation and Risk. The Journal of Finance, 49, 1541-1578.
- Nofsinger, J. R., & Sias, R. W. (1999). Herding and Feedback Trading by Institutional and Individual Investors. The Journal of Finance, 6, 2263-2295.
- Sias, R. W. (2004). Institutional Herding. The Review of Financial Studies, 17, 165-206.
- Stivers, C., & Sun, L. (2010). Cross-Sectional Return Dispersion and Time Variation in Value and Momentum Premiums. Journal of Financial and Quantitative Analysis, 45, 987-1014.
- Wang, J., & Wu, Y. (2011). Risk adjustment and momentum sources. Journal of Banking & Finance, 35, 1427-1435.
- Wang, Y., Chen, C. R., & Huang, Y. S. (2014). Economic policy uncertainty and corporate investment: Evidence from China. Pacific-Basin Finance Journal, 26, 227-243.
- Yao, Y. (2012). Momentum, contrarian, and the January seasonality. Journal of Banking & Finance, 36, 2757-2769.