An Empirical Study of Herding Behaviour in China’s A-Share and B-Share Markets: Evidence of Bidirectional Herding Activities

Research Question: This paper examines whether A-share markets predominated by unsophisticated local investors follow the trading of the B-share markets, dominated by sophisticated foreign institutional investors. Motivation: Our goal was to explore whether A-share investors follow the trading behaviour of the B-share investors or vice versa given the uniqueness of the Chinese markets. This paper drew on the findings of Chui and Kwok (1998) and Doukas and Wang (2013) who claimed that the Chinese foreign investors are more sophisticated and thus have an information advantage over unsophisticated local investors. Idea: The core idea of this paper was to empirically examine the herding behaviour in the four local Chinese markets and herding effect during the turbulent and calm period. The study was conducted using Cross-sectional Absolute Deviation (CSAD) as the dependent variable, the average of the cross-sectional returns of the market portfolio, the absolute value of market returns, and market returns squared as independent variables. Data: The analysis was conducted based on 1,782 days of observing the 188 individual firm’s stock returns from January 2010 to October 2016 from Shanghai A-share, Shanghai B-share, Shenzhen Ashare, and Shenzhen B-share. All relevant data was downloaded from DataStream. Method/Tools: We utilised the CSAD method to calculate the value of all the variables. Then we employed robust-regression to regress all these variables and t-test to determine the intensity of herding during the turbulent and calm period to reach the findings of this study. Findings: The results pointed out that the A-share markets were herding around the B-share markets and vice versa. Besides, there was cross-herding between the Shanghai Stock Exchange and Shenzhen Stock Exchange due to information transmission between the A-share and B-share holders in both markets. Finally, this study also discovered that there was a significant difference between the herding coefficients during the stock market turbulent period and the calm periods. Contributions: This study extends existing research on herding behaviour related to Chinese A-share and B-share markets which yet to be explored in detail and whether herding is more pronounced during the turbulent period compared to calm period.