Industry herding and market states: evidence from Chinese stock markets

This paper uses firm-level data to examine whether investors follow each other into and out of the same industries in China's A-share markets. Our study is a significant addition to the literature that investigates herding behaviour in an industry context with asymmetric herding effects with respect to different market states, different stock exchanges, and the role of the information technology sector. Using recent daily data from 17 May 2001 through 16 May 2011, we demonstrate strong evidence of industry herding in the A-share markets. Evidence further supports that stock return dispersions from the information technology sector play a significant role in explaining the other sectors' herding activity. After examining bull and bear markets, herding is more profound in some sectors during a bull market. Finally, industry herding is more prevalent in the Shenzhen stock exchange, while for some sectors in the Shanghai stock exchange herding is more prevalent during a bull market state.