Market Regimes and Herding Behavior in Chinese A and B Shares
41 Pages Posted: 22 Sep 2012
Date Written: April 8, 2012
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: Suggested Citation