Market memory, advance reaction, and retail investor herding

Xuchu Sun, Tangrong Li, Hongliang Zhu and Jianchang Zhu

Pacific-Basin Finance Journal, 2024, vol. 83, issue C

Abstract: The arrival of new information, in conjunction with investor cognitive biases, has commonly been acknowledged as the main cause of herding behavior. However, whether past market information embedded in market memory influences investor herding has been less explored. We utilize tick-level trading data from the Chinese stock market to examine the impact of the market memory formed of stocks' exceptional performance during their initial trading days on the future herding behavior of retail investors. The empirical results show that the market memory of newly listed stocks is positively correlated with retail investor herding one year later at the appearance of a market-wide upward trend. We also propose an advance reaction channel in which retail investors tend to pay early attention to and preemptively invest in stocks with deep market memory due to their limited attention and the availability heuristic, leading to further herding due to confirmation bias. Our findings show that market information, if not fully incorporated into current stock prices through investor trading, can be partly stored in market memory. When activated by specific market conditions, market memory can be recalled and affect investor behavior and subsequent price dynamics. Our findings provide additional evidence to challenge the efficient market hypothesis (EMH) from the perspective of behavioral finance.

Keywords: Market memory; Retail investor herding; Cognitive bias; Advance reaction (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X24000027
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x24000027

DOI: 10.1016/j.pacfin.2024.102251

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().