Market Regimes and Herding Behavior in Chinese A and B Shares

41 Pages Posted: 22 Sep 2012

See all articles by Mehmet Balcilar

Mehmet Balcilar

Eastern Mediterranean University

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Shawkat M. Hammoudeh

Montpellier Business School; Drexel University - Lebow College of Business

Date Written: April 8, 2012

Abstract

This paper proposes a Markov-Switching (MS) test of herding behavior in China’s segmented stock markets under a regime-changing environment. Using firm-level data on the A-shares (denominated in Chinese Renminbi) and B-shares (denominated in U.S. and Hong Kong dollars), we estimate an MS model of stock return dispersions to discern whether herding behavior exists under different market regimes. The findings suggest the presence of three market regimes (low, high and extreme or crash volatility) in all Chinese market segments with the common volatility transmission order of Low, High and Crash regimes, and that herding behavior is asymmetric, observed during the high and crash volatility periods only. We also find significant cross market herding effects from the A- to the B-share markets, suggesting that foreign institutional investors in the B-share markets pair with domestic investors during periods of market stress. Finally, we find that the A-share markets in China herd around the Hong Kong market during the high and crash volatility regimes, whereas no significant U.S. market effect is observed.

Keywords: Herding Behavior, Chinese A- and B-Shares, Dispersion Shocks, Markov-Switching

JEL Classification: C32, G11, G15

Suggested Citation

Balcilar, Mehmet and Demirer, Riza and Hammoudeh, Shawkat M., Market Regimes and Herding Behavior in Chinese A and B Shares (April 8, 2012). Available at SSRN: https://ssrn.com/abstract=2150300 or http://dx.doi.org/10.2139/ssrn.2150300

Mehmet Balcilar

Eastern Mediterranean University ( email )

Gazimagusa
Turkey

HOME PAGE: http://www.mbalcilar.net

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3144
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF)

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Shawkat M. Hammoudeh (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Drexel University - Lebow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States
2158956673 (Phone)
2158956975 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/HammoudehS/

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