Confucius and Herding Behaviour in the Stock Markets in China and Taiwan

Wing-Keung Wong,Batmunkh Munkh-Ulzii,Michael Mcaleer,Massoud Moslehpour

doi:10.3390/su10124413

Abstract

It has been argued in the literature that financial markets with a Confucian background tend to exhibit herding behaviour, or correlated behavioural patterns in individuals. This paper applies the return dispersion model to investigate financial herding behaviour by examining index returns from the stock markets in China and Taiwan. The sample period is from 1 January 1999 to 31 December 2014, and the data were obtained from Thomson Reuters Datastream. Although the sample period finishes in 2014, the data are more than sufficient to test the three hypotheses relating to the stock markets in China and Taiwan, both of which have Confucian cultures. The empirical results demonstrate significant herding behaviour under both general and specified markets conditions, including bull and bear markets, and high-low trading volume states. This paper contributes to the herding literature by examining three different hypotheses regarding the stock markets in China and Taiwan, and showing that there is empirical support for these hypotheses.

Highlights

Herding is typically associated with a correlated behavioural pattern across individuals, and represents human behaviour that mimics the actions of other individuals
A-share markets are considered as frontier markets, while both B-share markets and Taiwan Capitalization Weighted Stock Index (TAIEX) are classified as emerging markets
After reviewing the relevant literature, we have developed the three hypotheses presented in Section 4 to test whether the stock markets in China and Taiwan exhibit herding under different conditions

Summary

Introduction

Herding is typically associated with a correlated behavioural pattern across individuals, and represents human behaviour that mimics the actions of other individuals. Sequential decision theory states that each trader observes decisions made by others in making their own decisions. This is rational as the decisions of others can include useful information [3,4,5,6,7,8,9,10]. Stock markets in China provide an interesting insight for the analysis of herding behaviour. Since the establishment of the Shanghai Stock Exchange and the Shenzhen Stock Exchange in December 1990, two classes of shares have been issued, namely: (i) A-shares, which can be purchased and traded only by Chinese domestic investors, and are denominated in the local currency, the Renminbi; and (ii) B-shares, which were sold only to foreign investors before February 2001, after which they have been sold to both foreign and domestic investors. A-shares and B-shares are traded simultaneously on the Shanghai and Shenzhen exchanges

Objectives

Methods

Conclusion