سیاست پولی، نوسانات نرخ ارز، و رفتار توده ای در بازار سهام  Monetary policy, exchange rate fluctuation, and herding behavior in the stock market

1. Introduction Interest rate and foreign exchange rate are two important macroeconomic variables in open economics that significantly affect the stock market. Interest rate represents the stance of the central bank on monetary policy; it affects stock prices through discount rate channels, expected future dividends, and equity premium (Bernanke & Kuttner, 2005). In particular, the worldwide low interest rate environment plays a significant role in improving the global stock market after the subprime crisis. Meanwhile, movements in exchange rates affect stock prices because of their influences on the cash flow and international competitiveness of firms, as well as on capital flows in and out of a country. Numerous studies have investigated the effects of interest rate variation or monetary policy shocks on stock returns (Thorbecke, 1997; Bjørnland & Leitemo, 2009). Other studies have explored the relationship between exchange rate and stock returns (Hau & Rey, 2006; Cho, Choi, Kim & Kim, 2016). However, to the best of our knowledge, few studies have considered the effects of variations in interest and exchange rates on investor behavior at the micro-level. In this study, we address this gap and examine the effects of variations in interest and exchange rates on herding behavior in the stock market. Herding in financial markets refers to a behavioral pattern in which investors suppress their own beliefs and base their investment decisions solely on the collective actions of the market (Christie & Huang, 1995). Existing empirical studies have documented herding behavior in different countries, particularly in emerging markets due to considerable information asymmetry and the lack of maturity in these markets (Chang, Cheng & Khorana, 2000; Chiang & Zheng, 2010). As an important emerging market that is primarily dominated by unsophisticated retail investors, the Chinese stock market provides an interesting setting to analyze herding behavior. Moreover, the recent uncertainty in the economic development of China has resulted in increased fluctuations in interest and exchange rates, as well as in the intensive response of the stock market to these variations. In this context, this study aims to answer the following questions: (1) Do interest and exchange rates induce herding behavior in the Chinese stock market? (2) Under what market conditions will investors respond intensively to variations in interest and exchange rates, and what types of stocks are most affected? (3) Do monetary policy announcements and extreme exchange rate volatility induce herding? This study distinguishes itself from previous research and contributes to literature in the following aspects. First, this study is the first to examine the effects of variations in interest and exchange rates on herding behavior in the stock market. Our results indicate that interest rate increase and Chinese currency (hereafter CNY) depreciation will induce herding. This phenomenon is mainly manifested in down markets, thereby suggesting that investors respond intensively to bad news. Bikhchandani and Sharma (2000) distinguish between “spurious herding” (fundamental herding), in which investors facing similar decision problems and information sets make similar decisions, and “intentional herding” (non-fundamental herding), which indicates an obvious intent of investors to follow the behavior of others. These researchers suggest that spurious herding may increase the efficiency of financial markets, whereas intentional herding is expected to result in excess volatility and even financial instability. In this study, interest and exchange rates are public information that appears to lead to spurious herding. Nonetheless, the response to these fundamental changes by investors may unnecessarily improve the efficiency of the market, particularly under extreme interest rate or exchange rate volatility, because investors may overreact to unexpected information changes (Bondt & Thaler, 1985). Thus, this study investigates whether variations in interest and exchange rates can induce herding rather than overemphasize the pricing efficiency of fundamental herding. Second, we propose a method to detect the occurrence of intentional herding in the aggregate market. Macro information, such as interest rate and exchange rate, may induce spurious herding in the stock market; hence, questioning whether intentional herding occurs in this market is natural. With respect to this question, Holmes, Kallinterakis, and Ferreira (2013) analyze herding under different market conditions in Portugal and find that institutional herding is intentional driven by reputational reasons and/or informational cascades. Galariotis, Rong and Spyrou (2015) use the Fama-French three factors and the momentum factor to reflect common risk factors in stock valuation and decompose cross-sectional absolute deviation into fundamental and non-fundamental information parts. Unlike in previous studies, we determine the occurrence of intentional herding by examining whether investors herd on the idiosyncratic risk of stocks. Idiosyncratic volatility (IVOL) measures the idiosyncratic risk of a firm that does not arise from the systematic risk factors. Therefore, the occurrence of significantly varied herding coefficients among different IVOL portfolios comes from idiosyncratic risks rather than from fundamental changes that affect the entire market. Consequently, this phenomenon can be attributed to intentional herding. Consistent with our predictions, we find that the herding level of the highest IVOL quintile portfolio is twice that of the lowest quintile portfolio, which proves the occurrence of intentional herding in the Chinese stock market. After controlling for institutional ownership or number of institutions, the herding levels of the two highest IVOL quintiles weaken, thereby indicating that retail investors play an important role in reinforcing herding with the highest IVOL stocks.