Mutual Fund Herding and Return Comovement in Chinese Equities

Abstract

This paper explores the role mutual fund herding plays on the return comovement in Chinese equities. The results show that mutual fund herding significantly reduces the return comovement among Chinese stocks, providing evidence for the existence of a rational herding behavior by mutual funds. We find that the negative effect of mutual fund herding on return comovement is larger for stocks with low volatility and high mutual fund ownership. We also observe that mutual fund herding has a stronger impact on return comovement after the implementation of financial reforms in China in 2011 which allowed all shares to be traded freely among all market participants.