Confidence Herding Under Market Distress

Xiaochuan Tong


This paper investigates the role of government ownership in investor herding during volatile market conditions. The researcher documents significant confidence herding (attributed to government ownership) during market distress. To be specific, the researcher examined investor reactions during extreme market conditions, using daily data from the Chinese stock market from 1991 to 2016. The researcher shows that investors exhibit significant herd behavior in the Chinese market during extreme (high/low) market conditions, suggesting the existence of investor irrationality during such conditions. In addition, the magnitude of investor herding is greater in extremely high market conditions than extremely low market conditions. Most importantly, investors herd in high-state-owned stocks during extremely low market conditions. In contrast, investors do not exhibit significant herding in high-state-owned stocks during extremely high market conditions. The evidence implies that government ownership garners investor confidence during market distress.

Keywords: Herding, Government Ownership, China, Stock Market, Investor Behavior, Market Distress.

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