Herding Effect in China's A Share Stock Market under COVID-19 Pandemic

Abstract

Affected by the COVID-19 pandemic, China's stock market has been experiencing fluctuation in 2020. Deterioration of investors’ sentiment prompted more anomalies in the financial market, especially for large-scale unilateral transactions caused by investors’ fear and panic. This paper examines the existence of herding effect in Chinese A share main board market using both market-level and industry-level data by testing the non-linear relationship between cross-sectional absolute deviation of returns and market returns. Our findings indicate that herd formation existed in Chinese A share market during non-pandemic period and its effect got more pronounced during the COVID-19 pandemic period. We also observe that the herding effect turned out to be more obvious in the down phase of the stock market than that in the up phase. Sub-sample test classified by industry shows that industries such as transportation, leasing and business services, culture products, etc. have suffered from severely intensified herding effect during pandemic period, while the herding levels of manufacturing and real estate industries did not change significantly. The results shed light on understandings of the decision-making behavior for both individual investors and other market participants, and thus provide important policy implications.