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Herding in the Chinese and US stock markets: Evidence from a micro-founded approach

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  • Chen, Zhenxi
  • Zheng, Huanhuan

Abstract

Joining WTO accelerates the process of integrating China into the world financial market and should improve the development of the Chinese financial markets. Herding is one of the key aspects gauging the level of market development. Existing literature often uses aggregate level measures to investigate herding and therefore lacks the capability to differentiate autonomous market consensus from herding. This paper applies the Simulated Method of Moment estimator proposed by Chen and Lux (2018) to investigate the herding behavior in the Chinese and US stock markets. It is found that the asset pricing process is driven by fundamental factor and sentiment change due to autonomous switching and herding of the individual investors. We find evidence of herding behavior of individual investors in both stock markets. The Chinese stock market is mainly driven by behavioral sentiment dynamics due to the switching behaviors of investors while the US market is by fundamental factors. The severity of herding in the Chinese market is reduced after China joined the WTO.

Suggested Citation

  • Chen, Zhenxi & Zheng, Huanhuan, 2022. "Herding in the Chinese and US stock markets: Evidence from a micro-founded approach," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 597-604.
    • Handle: RePEc:eee:reveco:v:78:y:2022:i:c:p:597-604
    DOI: 10.1016/j.iref.2021.11.015
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    References listed on IDEAS

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    More about this item

    Keywords

    Simulation-based estimation; Herding; Agents-based model;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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