Mutual Fund Herding and Return Comovement in Chinese Equities

This paper explores the role mutual fund herding plays on the return comovement in Chinese stocks. 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 especially larger for stocks with low idiosyncratic volatility in which investors tend to have unified views. We also observe that mutual fund herding has a stronger impact on return comovement after the 2011 financial reforms were implemented in China which allowed all shares to be traded freely among all market participants. Lastly, we show that the revealed negative and significant relation between institutional herding and return comovement exists strongly in the US stock market as well