The impact of idiosyncratic volatility on the investors' herd behavior in the Chinese Stock Market

Khalil NAIT BOUZID
2022 Zenodo  
This study provides a comprehensive study of herding behavior in the Chinese Stock Market using the cross-sectional absolute deviation of returns method (CSAD) proposed by (Chang et al., 2000), which captures the non-linearity relationship between the dispersion of individual returns and market return. According to (Christie & Huang, 1995) and (Chang et al., 2000), in a stock market, herding behavior occurs when individual returns begin to converge towards the consensus of the market, leading
more » ... a decrease in the dispersion of stock return from the market return. More particularly, this study inspects the impact of idiosyncratic volatility on the investors' herd behavior in the Chinese Stock Market by delving deeper into the nature of herding and its asymmetric effect under extreme market conditions and at various stages of idiosyncratic volatility, as well as herding frequency and its asymmetric effect in increasing and falling markets. The results of this study indicate that idiosyncratic volatility is an essential component and determinant of herding conduct. The findings indicate that herding occurs in the Chinese stock market, and exhibits diverse patterns under different equity portfolios according to the levels of idiosyncratic volatility as well as the market trend, and that investment behavior tends to be different during three sub-periods. Moreover, the findings document that Financial Crisis period increases herding, especially within stock portfolios with higher idiosyncratic volatility.
doi:10.5281/zenodo.7250179 fatcat:ocxujarjjjdovppxmx2fx2qm74