Above: an illustration of herding in nature. Animals moving towards the same direction. Chinese stock market exhibits a higher degree of herding effect than advanced markets. In Chinese stock market, the majority of the participants are individual traders rather than institutions.

So, how does the herding phenomenon affect the stock market? We need an intuitive explaination. The stock market consist of companies of different nature. Aerospace and defense industry, electric and electronics industry, cyclical and non-cyclical consumer goods and service, etc. If one takes a look at these industries, normally during a single trading day, some of the sectors gains, some loses.

However, during the 2008 crisis, suddenly all the index, all the industries falled rapidly. The difference diminished. That is exactly the frame of time that we are going to research on.

The model:CSAD model. The data: Daily data from Shanghai Stock Exchange and Shenzhen Stock Exchange, 2007-2008