The destabilizing effect of mutual fund herding: Evidence from China

Wenjun Xue, Zhongzhi He and Yu Hu

International Review of Financial Analysis, 2023, vol. 88, issue C

Abstract: This paper examines the impact of mutual fund herding on the stability of China's stock market through the lens of idiosyncratic volatility. We show that mutual fund herding significantly amplifies future idiosyncratic volatility up to one-and-half years, suggesting a persistent destabilizing effect. We find that the destabilizing effect is larger for stocks with high mutual fund ownership and in high investor-sentiment periods. Furthermore, mutual fund herding destabilizes the stock market even further after China implemented the share reform in 2011. The destabilizing effect of mutual fund herding is robust to alternative measures of risk and China's institutional setting helps mitigate endogeneity concerns.

Keywords: Mutual fund herding; Destabilizing effect; Idiosyncratic volatility; China's stock market (search for similar items in EconPapers)
JEL-codes: G10 G15 G23 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:88:y:2023:i:c:s1057521923001278

DOI: 10.1016/j.irfa.2023.102611

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