The destabilizing effect of mutual fund herding: Evidence from China

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 vola-tility 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.