Mutual fund herding behavior and investment strategies in Chinese stock market

  • Received March 22, 2018;
    Accepted April 16, 2018;
    Published May 5, 2018
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.15(2).2018.08
  • Article Info
    Volume 15 2018, Issue #2, pp. 87-95
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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.

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    • 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