Herding and informed trading: Evidence from Chinese equity markets

Abstract

We empirically investigate the relationship between informed trading and market herding in China for the 2003–2022 period and find a negative contemporaneous relationship, which grows stronger for specific market/economic conditions. Herding comprises of a very strong noise-driven herding and a fundamentals-driven anti-herding; informed trading dampens the former, while boosting the latter. Our results hold when controlling for the 2012 anti-insider trading laws and days of price-limit hits. Evidence on the dynamic relationship between informed trading and herding demonstrates that informed trading Granger-causes herding. Overall, informed traders motivate stronger herding over time, dampening it contemporaneously, thus suggesting that they prey on the very herding they attract