The Asymmetric Effect of Mutual Fund Herding on Price Deviation: Evidence from the Chinese Stock Market

Abstract

Mutual funds, as significant participants in financial markets, play a crucial role in the formation of asset pricing. The relationship between herding behavior of mutual funds and mispricing has been a subject of intense debate among scholars. In this paper, we investigate the asymmetric impact of mutual fund herding on price deviation and explore the underlying mechanism. In terms of research design, this study selects relevant data on mutual fund holdings and stock trading in the Chinese A-share market from 2010 to 2023, we examine whether herding behavior leads to mispricing, specifically focusing on the asymmetric effects of herding buying and herding selling on stock price deviation from intrinsic value. This study distinguishes the trading direction of mutual fund herding behavior and separately examines the relationship between herding buying behavior and herding selling behavior with stock price deviation. Our empirical findings reveal that buying herding behavior is linked to positive price deviations from intrinsic value. However, selling herding behavior shows no significant relationship with price deviation. Furthermore, our results provide evidence that the herding buying of mutual funds stimulates similar trading sentiments among other market participants and contributes to the formation of market bubbles, while herding selling prompts counterbalancing trades, mitigating the impact of price deviation.