# Herding Behavior in China’s Stock Market under the Background of Implementation of the SHKSC Policy

Authors: Weili Gong; Silin Li; Hongxin Yu
Journal: Discrete Dynamics in Nature and Society
 (2022)

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## Abstract

In the financial market, because of information asymmetry, investors often ignore private information. Herding behavior in financial markets has become an important research branch of behavioral finance. China stock market has implemented the Shanghai-Hong Kong Stock Connect (SHKSC) policy and introduced mature funds, however, has it alleviated the herd effect? This article empirically verifies the existence of China's stock market before and after the implementation of the SHKSC policy. The research in this article found that the implementation of the SHKSC policy has not changed herding behavior. On the contrary, the herding effect has become more serious. It is further found that investors have no obvious investment preference for the industry to which the stock belongs. Investor investment is in line with the phenomenon of “slow rise and sharp fall.” When stock prices fall, the herd effect of the Chinese stock market is also more obvious.


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## Body

## 1. Introduction

Market information affects investors’ expectations, which, in turn, affects the expected price of investment objects. In an efficient market operation, the rapid and effective transmission of market information is an important prerequisite of the “efficient market hypothesis.” The “efficient market hypothesis” puts forward the perfectly competitive market faced by market participants, and it has become one of the important theories for studying the stock market [1]. It believes that when investors fully obtain and effectively use financial market information, the trend of stock prices reflects the behavior of investors, which is conducive to the speed and accuracy of information transmission in the stock market. However, some scholars start from the behavior of participating subjects and believe that because of the differences in information acceptance and processing capabilities of different investors, there are many shortcomings in the financial market, such as herd behavior [2]. The herding effect caused by incomplete information has become one of the most concerned topics for scholars in the field of behavioral economics and finance. The herd effect of investors is often formed in a short period of time, and stock prices often appear as “slow rises and sharp drops.” It can be said that the herd effect affects asset pricing and investment transactions, and it is one of the reasons for the large fluctuations in the financial market.Traditional economics assumes that people’s decision-making behavior is “rational” [3]. Market investors seek to maximize profits when costs are established, or to minimize costs when profits are established. Different from the assumptions studied in traditional economics, behavioral economics analyzes the behavioral characteristics of market entities through multidisciplinary perspectives, such as psychology, sociology, and finance. Regarding the phenomena of scale effect, overreaction, and underreaction in the financial market, traditional economics cannot give a reasonable explanation from the assumption of “rational man,” however, behavioral finance can effectively explain the above phenomena by studying investor psychology.In the financial market, common abnormal phenomena mainly include the following three situations: (1) abnormalities that occur at the macrolevel of the financial market, such as stock premiums or large fluctuations in the stock market [4]. (2) Abnormalities, such as long-term reversal, momentum trading, and other anomalies in the stock price level [5]. (3) Anomalies at the microlevel, such as insufficient trading volume, overinvestment, etc. In response to the abnormal phenomena in the financial market, behavioral finance studies the types of herd behavior from the perspective of investors’ psychology and provides a reasonable explanation [6].In the financial market, investors often have herd behavior, which reflects “irrational” characteristics. However, investors may adopt rational herding behavior to optimize investment and maximize profits, or investors make rational independent decisions, rather than based on group behavior. For investors, these two behavior phenomena do not belong to real herd behavior [7, 8]. In the case of clear personal information, even if individuals choose a strategy different from the group at first, investors will choose to keep consistent with the group at last, and this herd strategy will be proved wrong in the future [9]. In the market, herding behavior often has a huge impact. It aggravates large fluctuations in financial market prices and amplifies and spreads this impact, and ultimately, it leads to the instability of the financial market [10].If market entities, such as investors, abandon their own decision-making and choose the behavior of the majority group to determine their own decision-making behavior, then the behavior is group behavior [11]. In the case of environmental uncertainty, there is also a kind of convergence between individual decision-making and group behavior, and individual decision-making is often consistent with group behavior [12]. Specifically, it can be explained in the following two aspects:(1)
Because of the incompleteness of information in the financial market and the scarcity of market resources, investors often cannot obtain complete information, and it is difficult for investors to sort out part of the information obtained in a timely and effective manner and make reasonable judgments. At this time, investors often choose to wait and see the decision-making behavior of other investors. When there are more groups that make a unified decision, they think that the information obtained by the majority group is sounder. In this way, the decision-making of the majority group becomes the reference object of individual investors, and it is also called suboptimal decision-making. If the decision of an individual investor is inconsistent with the suboptimal decision, the individual investor will often abandon his own decision and choose the suboptimal decision [13].(2)
In the financial market, investors seek profit and avoid trouble, pursuing the lowest cost and the strongest benefit. Driven by this kind of self-interest, individual investors often choose the decision-making behavior of the majority group to reduce the cost of searching and processing information. For cost reasons, the individual investors have become not only one of the herds but also fund managers with professional investment experience, and technology often falls into herd behavior. At this time, the group faced by fund managers is composed of more outstanding fund managers. Fund managers can be said to be agents of many investors. Because of the existence of agency problems, agents often make judgments based on past information or experience to reduce the cost of information processing and form herding behavior. Especially in a financial crisis, the agent cannot process information in a timely and effective manner, and the performance of herd behavior will be more obvious [14].It can be said that herding behavior makes the volatility of stock market prices more violent and intensifies the risk of stock market crashes during a financial crisis. For listed companies, the herd behavior of institutional investors is undoubtedly a “crash accelerator” [15, 16].The study of herding behavior has now become an important field or object of financial research. In the herd, individuals choose the judgment results of the group and choose blindly-following strategies, to a certain extent, to reduce economic costs and reduce information asymmetry. However, this kind of decision-making behavior ignores its own actual situation and ignores information that is of real value to itself. Decisions that are assimilated by group behavior are not necessarily correct decisions [17–20]. This article will empirically analyze whether the implementation of SHKSC (Shanghai-Hong Kong Stock Connect policy) has brought about herding behavior and further analyzes whether the introduction of mature funds can improve this herding behavior [21, 22].


## 2. Methods and Data

### 2.1. Herd Behavioral Model

#### 2.1.1. Cross-Section Absolute Error Model

In the cross-section absolute error model, the LSV method, CSAD method, and CSSD method are the mainstream methods to study herding behavior in the stock market.(1) LSV Method. LSV is based on the willingness of investors in the financial market to measure the gap between the investors’ artificial ideal state of complete rationality and the actual situation.(1)Hi=Pi,t−EPt−AF,where Pi,t represents the purchase proportion of i-stock in unit time t. E (Pt) represents the expected value of the stock price at time t. AF represents the expected value of investors in the ideal state of complete rationality. When the consistency of investors’ behavior increases, the difference |Pi,t—E (Pt)| will increase, and the value Hi,t that can be seen from the formula will also increase. When Hi,t increases to a certain value, herding behavior will appear. However, because of ignoring the stock trading volume, the LSV method cannot extract the data of new fund investors in the long-span sample data.(2) CSSD Method. The CSSD method calculates the standard deviation of the cross-section based on the deviation between the return rate of individual stock and the market return rate.(2)CSSD=∑i=1Nri−rm2N−1,CSSDt=α+β1XtUP+β2XTDOWM+εt,where rm represents the average return rate of the stock market. XtUP and XtDOWM are dummy variables. The value XtUP is 1 (the bull market exceeds the critical value) or 0 (the bull market does not exceed the critical value). The value XtDOWM is 1 (the bear market is not below the critical value) or 0 (the bear market is below the critical value).When CSSDt tends to zero, the regression coefficients β1 and β2 in the equation are less than zero, which indicates that investors’ investment tendency is consistent with the fluctuation of stock price, and the fluctuation of the stock price is less than the fluctuation of the market. Currently, there is no herd behavior in the market. The CSSD method is more suitable for the test of herding, however, the index of CSSD standard deviation is more conservative. Hence, the CSSD method is effective only when most investors’ behavior trend is the same.(3) CSAD Method. The CSAD method uses CAPM to replace the standard deviation of cross-section in the CSSD method with absolute deviation.(3)CSAD=1N∑i=1Nri−rm.The expected return rate of CAPM is the sum of risk premium and risk-free rate.(4)EiRi=rf+βiEtRm−rf,where rf represents the risk-free interest rate. Βi [Ei (Rm)—rf] represents the risk premium. βi represents the risk coefficient of the i-stock.According to the definition of CSAD,(5)ECSADt=1N∑i=1Nβi−1EtRm−rf.Then, the derivationEi (Rm) is given as,(6)∂2ECSADt∂ERm=0.CSAD is positively correlated withRm. Therefore, the regression equation of CSAD is as follows:(7)CSADt=β0UP+β1UPRm,t+β2UPRm,t2+εt,CSADt=β0DOWM+β1DOWMRm,t+β2DOWMRm,t2+εt.When there are three situations in the regression equation, there will be herding behavior in the market.(A)
β1UP and β1DOWM are obviously less than zero. At this time, CSAD will show a downward trend. The investment tendency of investors in the stock market will decline.(B)
β1UP and β1DOWM are greater than zero. Investors’ investment tendency is still consistent with Rm,t.(C)
CSAD has a nonlinear relationship withRm,t.Different from CSSD, CSAD can show slight changes in the market, and the standard deviation measurement index is more accurate. It is more sensitive to detect herding behavior, however, there are some cases of overestimating herding behavior.


#### 2.1.2. Relative Cross-Section Deviation Model of Excess Return

The relative cross-sectional deviation model of excess return RCSDI is based on the tendency of ARCH volatility to increase with the rise of price to test whether there is herding behavior in the market. The formula is as follows:(8)RCSDI=1N−11hm,t∑i=1NRi,t−Rt¯2,where Ri,t refers to the return rate of the stock i in unit time t. hm,t is the market volatility measured according to the GARCH (1, 1) model.When herding behavior exists, the necessary condition is that the RCSDI value is negatively correlated with trading volume. When the RCSDI value is high, it indicates that the price will fluctuate greatly, and the trading volume may be low. When the RCSDI value is low, the price fluctuation is relatively small, but the trading volume increases. However, it should be noted that large trading volume does not mean herding behavior because the information is also one of the reasons for the formation of high-trading volume.Investors with herding behavior need observation signals as a reference. When the trading volume is large enough, investors will believe this common information enough and think that only following the mainstream can maximize their own interests, thus ignoring their own expectations and taking a consistent decision. In other words, when the market has a high turnover in a certain period, i.e., when the RCSDI value is negatively correlated with lagged turnover, herding is most likely to occur. After logarithm treatment on both sides of the equation, the following regression equation is obtained.(9)lnRCSDIt=β0+β1lnRCSDIt−1+β2lnVt−1+β3ΔlnVt+εt,(10)lnRCSDIt=β0UP+β1UPlnRCSDIt−1+β2UPlnVt−1+β3UPΔlnVt+εt,(11)lnRCSDIt=β0DOWM+β1DOWMlnRCSDIt−1+β2DOWMlnVt−1+β3DOWMΔlnVt+εt.Vt represents the turnover at time t. R represents the stock yield, which can be calculated by Ri,t = Pt–Pt−1. In this paper, the interest rate of SHKSC is calculated by equal weight.(12)Rt¯=∑i=1NRiN.


### 2.2. Sample Selection

In this paper, the A-share index of the Shanghai Stock Exchange is used as volatility index, which is divided into two parts: before and after the implementation of the SHKSC policy. We use the GARCH value in the relative cross-sectional deviation degree model of excess return to replacehm,t. We extract 768,424 stock data samples from 2010 to 2018. The sample comes from the wind database. We employ the STATA15 software for research.


## 2.1. Herd Behavioral Model

### 2.1.1. Cross-Section Absolute Error Model

In the cross-section absolute error model, the LSV method, CSAD method, and CSSD method are the mainstream methods to study herding behavior in the stock market.(1) LSV Method. LSV is based on the willingness of investors in the financial market to measure the gap between the investors’ artificial ideal state of complete rationality and the actual situation.(1)Hi=Pi,t−EPt−AF,where Pi,t represents the purchase proportion of i-stock in unit time t. E (Pt) represents the expected value of the stock price at time t. AF represents the expected value of investors in the ideal state of complete rationality. When the consistency of investors’ behavior increases, the difference |Pi,t—E (Pt)| will increase, and the value Hi,t that can be seen from the formula will also increase. When Hi,t increases to a certain value, herding behavior will appear. However, because of ignoring the stock trading volume, the LSV method cannot extract the data of new fund investors in the long-span sample data.(2) CSSD Method. The CSSD method calculates the standard deviation of the cross-section based on the deviation between the return rate of individual stock and the market return rate.(2)CSSD=∑i=1Nri−rm2N−1,CSSDt=α+β1XtUP+β2XTDOWM+εt,where rm represents the average return rate of the stock market. XtUP and XtDOWM are dummy variables. The value XtUP is 1 (the bull market exceeds the critical value) or 0 (the bull market does not exceed the critical value). The value XtDOWM is 1 (the bear market is not below the critical value) or 0 (the bear market is below the critical value).When CSSDt tends to zero, the regression coefficients β1 and β2 in the equation are less than zero, which indicates that investors’ investment tendency is consistent with the fluctuation of stock price, and the fluctuation of the stock price is less than the fluctuation of the market. Currently, there is no herd behavior in the market. The CSSD method is more suitable for the test of herding, however, the index of CSSD standard deviation is more conservative. Hence, the CSSD method is effective only when most investors’ behavior trend is the same.(3) CSAD Method. The CSAD method uses CAPM to replace the standard deviation of cross-section in the CSSD method with absolute deviation.(3)CSAD=1N∑i=1Nri−rm.The expected return rate of CAPM is the sum of risk premium and risk-free rate.(4)EiRi=rf+βiEtRm−rf,where rf represents the risk-free interest rate. Βi [Ei (Rm)—rf] represents the risk premium. βi represents the risk coefficient of the i-stock.According to the definition of CSAD,(5)ECSADt=1N∑i=1Nβi−1EtRm−rf.Then, the derivationEi (Rm) is given as,(6)∂2ECSADt∂ERm=0.CSAD is positively correlated withRm. Therefore, the regression equation of CSAD is as follows:(7)CSADt=β0UP+β1UPRm,t+β2UPRm,t2+εt,CSADt=β0DOWM+β1DOWMRm,t+β2DOWMRm,t2+εt.When there are three situations in the regression equation, there will be herding behavior in the market.(A)
β1UP and β1DOWM are obviously less than zero. At this time, CSAD will show a downward trend. The investment tendency of investors in the stock market will decline.(B)
β1UP and β1DOWM are greater than zero. Investors’ investment tendency is still consistent with Rm,t.(C)
CSAD has a nonlinear relationship withRm,t.Different from CSSD, CSAD can show slight changes in the market, and the standard deviation measurement index is more accurate. It is more sensitive to detect herding behavior, however, there are some cases of overestimating herding behavior.


### 2.1.2. Relative Cross-Section Deviation Model of Excess Return

The relative cross-sectional deviation model of excess return RCSDI is based on the tendency of ARCH volatility to increase with the rise of price to test whether there is herding behavior in the market. The formula is as follows:(8)RCSDI=1N−11hm,t∑i=1NRi,t−Rt¯2,where Ri,t refers to the return rate of the stock i in unit time t. hm,t is the market volatility measured according to the GARCH (1, 1) model.When herding behavior exists, the necessary condition is that the RCSDI value is negatively correlated with trading volume. When the RCSDI value is high, it indicates that the price will fluctuate greatly, and the trading volume may be low. When the RCSDI value is low, the price fluctuation is relatively small, but the trading volume increases. However, it should be noted that large trading volume does not mean herding behavior because the information is also one of the reasons for the formation of high-trading volume.Investors with herding behavior need observation signals as a reference. When the trading volume is large enough, investors will believe this common information enough and think that only following the mainstream can maximize their own interests, thus ignoring their own expectations and taking a consistent decision. In other words, when the market has a high turnover in a certain period, i.e., when the RCSDI value is negatively correlated with lagged turnover, herding is most likely to occur. After logarithm treatment on both sides of the equation, the following regression equation is obtained.(9)lnRCSDIt=β0+β1lnRCSDIt−1+β2lnVt−1+β3ΔlnVt+εt,(10)lnRCSDIt=β0UP+β1UPlnRCSDIt−1+β2UPlnVt−1+β3UPΔlnVt+εt,(11)lnRCSDIt=β0DOWM+β1DOWMlnRCSDIt−1+β2DOWMlnVt−1+β3DOWMΔlnVt+εt.Vt represents the turnover at time t. R represents the stock yield, which can be calculated by Ri,t = Pt–Pt−1. In this paper, the interest rate of SHKSC is calculated by equal weight.(12)Rt¯=∑i=1NRiN.


## 2.1.1. Cross-Section Absolute Error Model

In the cross-section absolute error model, the LSV method, CSAD method, and CSSD method are the mainstream methods to study herding behavior in the stock market.(1) LSV Method. LSV is based on the willingness of investors in the financial market to measure the gap between the investors’ artificial ideal state of complete rationality and the actual situation.(1)Hi=Pi,t−EPt−AF,where Pi,t represents the purchase proportion of i-stock in unit time t. E (Pt) represents the expected value of the stock price at time t. AF represents the expected value of investors in the ideal state of complete rationality. When the consistency of investors’ behavior increases, the difference |Pi,t—E (Pt)| will increase, and the value Hi,t that can be seen from the formula will also increase. When Hi,t increases to a certain value, herding behavior will appear. However, because of ignoring the stock trading volume, the LSV method cannot extract the data of new fund investors in the long-span sample data.(2) CSSD Method. The CSSD method calculates the standard deviation of the cross-section based on the deviation between the return rate of individual stock and the market return rate.(2)CSSD=∑i=1Nri−rm2N−1,CSSDt=α+β1XtUP+β2XTDOWM+εt,where rm represents the average return rate of the stock market. XtUP and XtDOWM are dummy variables. The value XtUP is 1 (the bull market exceeds the critical value) or 0 (the bull market does not exceed the critical value). The value XtDOWM is 1 (the bear market is not below the critical value) or 0 (the bear market is below the critical value).When CSSDt tends to zero, the regression coefficients β1 and β2 in the equation are less than zero, which indicates that investors’ investment tendency is consistent with the fluctuation of stock price, and the fluctuation of the stock price is less than the fluctuation of the market. Currently, there is no herd behavior in the market. The CSSD method is more suitable for the test of herding, however, the index of CSSD standard deviation is more conservative. Hence, the CSSD method is effective only when most investors’ behavior trend is the same.(3) CSAD Method. The CSAD method uses CAPM to replace the standard deviation of cross-section in the CSSD method with absolute deviation.(3)CSAD=1N∑i=1Nri−rm.The expected return rate of CAPM is the sum of risk premium and risk-free rate.(4)EiRi=rf+βiEtRm−rf,where rf represents the risk-free interest rate. Βi [Ei (Rm)—rf] represents the risk premium. βi represents the risk coefficient of the i-stock.According to the definition of CSAD,(5)ECSADt=1N∑i=1Nβi−1EtRm−rf.Then, the derivationEi (Rm) is given as,(6)∂2ECSADt∂ERm=0.CSAD is positively correlated withRm. Therefore, the regression equation of CSAD is as follows:(7)CSADt=β0UP+β1UPRm,t+β2UPRm,t2+εt,CSADt=β0DOWM+β1DOWMRm,t+β2DOWMRm,t2+εt.When there are three situations in the regression equation, there will be herding behavior in the market.(A)
β1UP and β1DOWM are obviously less than zero. At this time, CSAD will show a downward trend. The investment tendency of investors in the stock market will decline.(B)
β1UP and β1DOWM are greater than zero. Investors’ investment tendency is still consistent with Rm,t.(C)
CSAD has a nonlinear relationship withRm,t.Different from CSSD, CSAD can show slight changes in the market, and the standard deviation measurement index is more accurate. It is more sensitive to detect herding behavior, however, there are some cases of overestimating herding behavior.


## 2.1.2. Relative Cross-Section Deviation Model of Excess Return

The relative cross-sectional deviation model of excess return RCSDI is based on the tendency of ARCH volatility to increase with the rise of price to test whether there is herding behavior in the market. The formula is as follows:(8)RCSDI=1N−11hm,t∑i=1NRi,t−Rt¯2,where Ri,t refers to the return rate of the stock i in unit time t. hm,t is the market volatility measured according to the GARCH (1, 1) model.When herding behavior exists, the necessary condition is that the RCSDI value is negatively correlated with trading volume. When the RCSDI value is high, it indicates that the price will fluctuate greatly, and the trading volume may be low. When the RCSDI value is low, the price fluctuation is relatively small, but the trading volume increases. However, it should be noted that large trading volume does not mean herding behavior because the information is also one of the reasons for the formation of high-trading volume.Investors with herding behavior need observation signals as a reference. When the trading volume is large enough, investors will believe this common information enough and think that only following the mainstream can maximize their own interests, thus ignoring their own expectations and taking a consistent decision. In other words, when the market has a high turnover in a certain period, i.e., when the RCSDI value is negatively correlated with lagged turnover, herding is most likely to occur. After logarithm treatment on both sides of the equation, the following regression equation is obtained.(9)lnRCSDIt=β0+β1lnRCSDIt−1+β2lnVt−1+β3ΔlnVt+εt,(10)lnRCSDIt=β0UP+β1UPlnRCSDIt−1+β2UPlnVt−1+β3UPΔlnVt+εt,(11)lnRCSDIt=β0DOWM+β1DOWMlnRCSDIt−1+β2DOWMlnVt−1+β3DOWMΔlnVt+εt.Vt represents the turnover at time t. R represents the stock yield, which can be calculated by Ri,t = Pt–Pt−1. In this paper, the interest rate of SHKSC is calculated by equal weight.(12)Rt¯=∑i=1NRiN.


## 2.2. Sample Selection

In this paper, the A-share index of the Shanghai Stock Exchange is used as volatility index, which is divided into two parts: before and after the implementation of the SHKSC policy. We use the GARCH value in the relative cross-sectional deviation degree model of excess return to replacehm,t. We extract 768,424 stock data samples from 2010 to 2018. The sample comes from the wind database. We employ the STATA15 software for research.


## 3. Results

Before empirical analysis, we need to analyze the return rate of the overall sample. Figure1 shows that the return rate of the A-share composite index has an obvious left-side peak, with the characteristic of “peak and tail.” Figure 2 shows that the average yield of the A-share composite index is less than 0, which shows that investing in A-shares has not produced good returns for investors. At the same time, the rate of return presents obvious fluctuations, and this violent fluctuation provides a good sample basis for the study of the herd effect.Figure 1
Return characteristics of A-share market composite index.Figure 2
Daily yield linearity of A-share market composite index.


### 3.1. Stationarity Test

The data selected in this article are panel data because various variables or influencing factors in the financial market have a strong correlation, i.e., serial correlation. It can easily lead to false regression results. For this reason, it is necessary to carry out a stationarity test to avoid the serious serial correlation of variables. We use the ADF method to perform unit root tests on variables. Table1 shows the ADF test results of ln (RCSDI) and ln (V) in the overall sample.Table 1
Stationarity test results.
VariableADF value1%5%10%Resultln (RCSDI)−2.990−3.143−2.664−2.085Stableln (V)−2.832−3.143−2.664−2.085StableTable1 shows that the ADF value of ln (RCSDI) is −2.990, which lies between the significance level of 1% and the significance level of 5%. It shows that at the 5% significance level, ln (RCSDI) is stable. The ADF value of ln (V) is −2.832, which lies between the 1% significance level and the 5% significance level. It shows that ln (V) is stable at the 5% significance level.


### 3.2. The Relationship between Relative Cross-Section Deviation of Excess Return and Trading Volume

To verify the existence of the herd effect, based on the results of the stationarity test, we find that ln (RCSDI) and ln (V) are the single integers of order 0. Based on formula (9), we analyze the correlation between the two variables. As can be seen from Figure 3, ln (RCSDI) and ln (V) have a positive correlation as a whole.Figure 3
Relationship between ln (RCSDI) and ln (V).Table2 shows the results of empirical analysis, showing that the overall sample has a herd effect. Specifically, the value of β1 is 0.6277, indicating that the average influence of ln (RCSDI) from the previous period on the value of the current period is 0.6277, with other factors unchanged. The β2 value is 0.0982, indicating that the average influence of the previous period’s ln (V) on the current period's value is 0.0982 under the condition that other factors remain unchanged. The β3 value is 0.5039, which indicates that under the condition of other factors being constant, an increase of 1 unit of ln (V) will have an average impact on ln (RCSDI) of the current period of 0.5039.Table 2
Test results.
Coefficient valueβ0β1β2β3Result−1.7438∗∗∗ (−14.6395)0.6277∗∗∗ (32.2093)0.0982∗∗∗ (6.9431)0.5039∗∗∗ (15.2784)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.By the analysis of the aforementioned content, we find that the herding behavior of investors not only has a significant positive proportional relationship with the ln (V) of the previous period but also has an impact on the next period if there is herding behavior in the sampling interval of the previous period. Herding behavior has a certain degree of continuity and persistence, and there will be some negative effects. The continuation of the sentiment in the relevant investment content has impact on investors’ rational judgment and investment decision-making. If it happens, investors will pay attention to the increase in the current period but ignore other information. Through the significance of β3 value, the trading volume of the current stock is more significant, which shows that there is obvious herding behavior in the SHKSC market.


### 3.3. Herding Behavior before and after Policy Implementation

To deeply study whether the herding behavior among investors will change after the implementation of the SHKSC policy in China’s stock market, we divided the samples into two parts. One is the stage before the implementation of the SHKSC policy, and the other is the stage after the implementation of the SHKSC policy. Hence, we can compare the herding effect's change before and after the SHKSC policy.Similarly, before empirical analysis, we need to test the stability of the sample data before and after the policy is implemented in China. Table3 shows the ADF test results.Table 3
Stationarity test results.
VariableADF1%5%10%ResultBefore policy implementationln (RCSDI)−3.7942−3.8147−2.7904−2.4828Stableln (V)−3.3424−3.5421−2.8319−2.4756StableAfter policy implementationln (RCSDI)−3.3948−3.5573−2.8364−2.5374Stableln (V)−3.2141−3.5381−2.9203−2.6371StableBy the analysis of the calculation results, we find that before and after the implementation of the SHKSC policy, the relationship between ln (RCSDI) and ln (V) is presented in Figure4. We find that ln (RCSDI) and ln (V) have a positive correlation.Figure 4
Relationship between ln (RCSDI) and ln (V) before the policy.By the analysis of the calculation results, we find that after the implementation of the SHKSC policy, the relationship between ln (RCSDI) and ln (V) is as mentioned below in Figure5. We find that ln (RCSDI) and ln (V) still have a positive correlation.Figure 5
Relationship between ln (RCSDI) and ln (V) after the policy.Table4 shows that before the implementation of the SHKSC policy, there is herding behavior of investors. The value of β1 is 0.4316, indicating that the average influence of ln (RCSDI) from the previous period on the value of the current period is 0.4316, with other factors unchanged. The β2 value is 0.0538, indicating that the average influence of the previous period’s ln (V) on the current period’s value is 0.0538 under the condition that other factors remain unchanged. The β3 value is 0.3945, which indicates that under the condition of other factors being constant, an increase of 1 unit of ln (V) will have an average impact on ln (RCSDI) of the current period of 0.3945.Table 4
Empirical test results before and after the implementation of the policy.
Coefficient valueβ0β1β2β3Before policy implementation−2.2374∗∗∗ (−11.4721)0.4316∗∗∗ (13.4239)0.0538∗∗∗ (3.2767)0.3945∗∗∗ (10.0653)After policy implementation−0.9311∗∗∗ (−6.3783)0.6135∗∗∗ (17.6539)0.0139∗ (1.9775)0.5583∗∗∗ (5.8621)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.After the implementation of the SHKSC policy, we find there still has obvious herding behavior. The value ofβ1 is 0.6135, indicating that the average influence of ln (RCSDI) from the previous period on the value of the current period is 0.6135, with other factors unchanged. The β2 value is 0.0139, indicating that the average influence of the previous period's ln (V) on the current period’s value is 0.0139 under the condition that other factors remain unchanged. The β3 value is 0.5583, which indicates that under the condition of other factors being constant, an increase of 1 unit of ln (V) will have an average impact on ln (RCSDI) of the current period of 0.5583. The results show that the relevant investors in China did not fully consider a lot of information in the market after the introduction of relevant policies. Upon the calculation and analysis of the correlation coefficient of ln (RCSDI), we find that after the implementation of the policy, the herding behavior of the investors has gradually increased.The possible reason is that the basic information disclosure mechanism of China’s stock market is not perfect. There is a significant asymmetry of information, which leads to some investors being unable to invest reasonably. They tend to follow the investment after analyzing the investment behavior of other investors. Compared with many mainland investors, they are prone to herding behavior.In reality, many investors, because of the lack of investment experience in China’s stock market, have less comprehensive investment philosophy and relevant knowledge when they enter the stock market to carry out investment behavior. Compared with the relevant information of investment stocks, investors tend to pay more attention to other investors. Because of the investors’ speculative psychology, these investors do not pay close attention to the relevant information of the stocks they need to invest in, which easily leads to herd behavior in the stock market.


### 3.4. Herding Behavior in Rising and Falling Stages

According to the previous comparative analysis of the herding behavior of different stocks in the stock market, the rising and falling behavior of stocks is calculated by two equations, which are as follows:(13)lnRCSDIt=β0UP+β1UPlnRCSDIt−1+β2UPlnVt−1+β3UPΔlnVt+εt,lnRCSDIt=β0DOWM+β1DOWMlnRCSDIt−1+β2DOWMlnVt−1+β3DOWMΔlnVt+εt.In the process of calculation, the data are divided into two parts. One is the rising stage, and the other is the declining stage. To improve the reliability of the calculation and the stationarity of the results, the ADF test is carried out on ln (RCSDI) and ln (V) of the two stages. Table5 shows the results of the ADF test.Table 5
ADF test results of rising stage and falling stage.
VariableADF1%5%10%ResultRising stageln (RCSDI)−6.8663−4.1732−3.2838−2.8632Stableln (V)−3.1293−3.5639−2.7897−2.4534StableFalling stageln (RCSDI)−7.0822−3.7182−3.0893−2.3455Stableln (V)−2.9265−3.8831−2.5889−2.4003StableBy the calculation test, we find that ln (RCSDI) and ln (V) have no unit root. Hence, the follow-up regression analysis can be carried out. Table6 shows the actual regression results.Table 6
Empirical test results of rising stage and falling stage.
Coefficient valueβ0UPβ1UPβ2UPβ3UPRising stage−3.6712∗∗∗ (−18.2042)0.1469∗∗∗ (4.3209)0.1734∗∗∗ (6.1712)0.1835∗∗∗ (6.8742)Coefficient valueβ0DOWMβ1DOWMβ2DOWMβ3DOWMFalling stage−3.5128∗∗∗ (−17.8382)0.2187∗∗∗ (7.3843)0.1692∗∗∗ (5.9739)0.2194∗∗∗ (8.3774)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.By the empirical analysis of variables, we find that in the rising stage of the foundation, the coefficients ofβ1UP, β2UP, and β3UP are 0.1469, 0.1734, and 0.1835, respectively. Hence, there is herding behavior in the investment market. When the stock price rises in the process of investment, there is a certain convergence of investors.In the descending stage of the foundation, the coefficients ofβ1DOWM, β2DOWM, and β3DOWM are 0.2187, 0.1692, and 0.2194, respectively. Compared with the rising stage of the stock price, the investor sentiment has a certain continuation in the declining stage, which is in line with the phenomenon of “slow rises and sharp drops.” When the stock price falls, the increase of the turnover indicates that there is a certain degree of herding behavior in China's stock market. By the analysis, we can find that the SHKSC policy cannot significantly reduce the herding behavior and probability of investors in the market. To a certain extent, it enhances the herding behavior of investors, resulting in increased volatility in the market.


### 3.5. Herding Behavior with Different Market Value

According to the division of whether the market value of the stock sample is more than 20 billion yuan, we find that there are 173 stocks with a market value of more than 20 billion yuan and 231 stocks with a market value of less than 20 billion yuan in Table7.Table 7
Empirical test results of herding behavior with different market value scale.
Coefficient valueβ0β1β2β3≥20 billion market value−1.8732∗∗∗0.5733∗∗∗0.1102∗∗∗0.6177∗∗∗(−12.0246)(28.0381)(8.9331)(12.8372)<20 billion market value−1.9321∗∗∗0.6066∗∗∗0.1208∗∗∗0.5638∗∗∗(−15.3044)(23.3752)(10.8463)(18.8372)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.According to the empirical analysis results of the model, we find there is obvious herding behavior. When the market value of the stocks invested by investors is less than 20 billion, the probability and degree of herding behavior of the investors are more obvious, and the market volatility of these stocks may be more significant. When the market value of stocks invested by investors exceeds 20 billion, investors tend to pay attention to the corresponding behavior of the investment “market maker” and pay more attention to the increase of different investment ranges. The main reason for this phenomenon may be that the professional analysis ability of Chinese investors is limited, and they do not fully understand the stock resources and environment in a short period of time.By the comparative analysis, we find that some stock investors in China have obvious speculative psychology and game psychology, and there is no reasonable long-term investment plan, which leads to obvious herding behavior in China’s stock market. Both Chinese mainland investors and Hongkong investors have a more obvious herding behavior, and the preference for stock market capitalization is not obvious.


### 3.6. Herding Behavior in Different Industries

The stock can be divided into several types according to different industries, including real estate industry, material industry, chemical industry, consumer retail industry, healthcare industry, financial industry, and so on. We analyze whether different investors have obvious industry investment preferences in the process of investment. Table8 shows the results of herding behavior in different industries.Table 8
Empirical test results of herding behavior in different industries.
Coefficient valueβ0β1β2β3Material industry−1.9239∗∗∗0.5391∗∗∗0.1231∗∗∗0.7927∗∗∗(−15.3843)(27.3048)(6.8481)(26.3744)Real estate industry−3.3124∗∗∗0.4301∗∗∗0.2849∗∗∗0.7391∗∗∗(−21.2338)(17.7483)(16.6319)(12.6362)Chemical industry−2.2031∗∗∗0.5033∗∗∗0.1899∗∗∗0.5663∗∗∗(−21.8287)(20.0981)(13.4263)(12.1208)Financial industry−1.2437∗∗∗0.7366∗∗∗0.1125∗∗∗1.2126∗∗∗(−9.0874)(37.6075)(8.8055)(19.6780)Consumer retail industry−2.1937∗∗∗0.6881∗∗∗0.1732∗∗∗1.1203∗∗∗(−15.0674)(23.0329)(9.8751)(14.4392)Healthcare industry−1.8374∗∗∗0.6375∗∗∗1.7732∗∗∗1.6453∗∗∗(−20.3742)(22.1516)(19.8377)(20.5361)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.According to the empirical analysis results of the model, the six major industries mentioned above have significant herding behavior. The industries that were most significantly affected by the previous period’s yield are finance, healthcare, and material industries. It shows that most investors have a significant follow-up phenomenon in the process of stock investment, and there is no in-depth analysis of relevant industry information.


## 3.1. Stationarity Test

The data selected in this article are panel data because various variables or influencing factors in the financial market have a strong correlation, i.e., serial correlation. It can easily lead to false regression results. For this reason, it is necessary to carry out a stationarity test to avoid the serious serial correlation of variables. We use the ADF method to perform unit root tests on variables. Table1 shows the ADF test results of ln (RCSDI) and ln (V) in the overall sample.Table 1
Stationarity test results.
VariableADF value1%5%10%Resultln (RCSDI)−2.990−3.143−2.664−2.085Stableln (V)−2.832−3.143−2.664−2.085StableTable1 shows that the ADF value of ln (RCSDI) is −2.990, which lies between the significance level of 1% and the significance level of 5%. It shows that at the 5% significance level, ln (RCSDI) is stable. The ADF value of ln (V) is −2.832, which lies between the 1% significance level and the 5% significance level. It shows that ln (V) is stable at the 5% significance level.


## 3.2. The Relationship between Relative Cross-Section Deviation of Excess Return and Trading Volume

To verify the existence of the herd effect, based on the results of the stationarity test, we find that ln (RCSDI) and ln (V) are the single integers of order 0. Based on formula (9), we analyze the correlation between the two variables. As can be seen from Figure 3, ln (RCSDI) and ln (V) have a positive correlation as a whole.Figure 3
Relationship between ln (RCSDI) and ln (V).Table2 shows the results of empirical analysis, showing that the overall sample has a herd effect. Specifically, the value of β1 is 0.6277, indicating that the average influence of ln (RCSDI) from the previous period on the value of the current period is 0.6277, with other factors unchanged. The β2 value is 0.0982, indicating that the average influence of the previous period’s ln (V) on the current period's value is 0.0982 under the condition that other factors remain unchanged. The β3 value is 0.5039, which indicates that under the condition of other factors being constant, an increase of 1 unit of ln (V) will have an average impact on ln (RCSDI) of the current period of 0.5039.Table 2
Test results.
Coefficient valueβ0β1β2β3Result−1.7438∗∗∗ (−14.6395)0.6277∗∗∗ (32.2093)0.0982∗∗∗ (6.9431)0.5039∗∗∗ (15.2784)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.By the analysis of the aforementioned content, we find that the herding behavior of investors not only has a significant positive proportional relationship with the ln (V) of the previous period but also has an impact on the next period if there is herding behavior in the sampling interval of the previous period. Herding behavior has a certain degree of continuity and persistence, and there will be some negative effects. The continuation of the sentiment in the relevant investment content has impact on investors’ rational judgment and investment decision-making. If it happens, investors will pay attention to the increase in the current period but ignore other information. Through the significance of β3 value, the trading volume of the current stock is more significant, which shows that there is obvious herding behavior in the SHKSC market.


## 3.3. Herding Behavior before and after Policy Implementation

To deeply study whether the herding behavior among investors will change after the implementation of the SHKSC policy in China’s stock market, we divided the samples into two parts. One is the stage before the implementation of the SHKSC policy, and the other is the stage after the implementation of the SHKSC policy. Hence, we can compare the herding effect's change before and after the SHKSC policy.Similarly, before empirical analysis, we need to test the stability of the sample data before and after the policy is implemented in China. Table3 shows the ADF test results.Table 3
Stationarity test results.
VariableADF1%5%10%ResultBefore policy implementationln (RCSDI)−3.7942−3.8147−2.7904−2.4828Stableln (V)−3.3424−3.5421−2.8319−2.4756StableAfter policy implementationln (RCSDI)−3.3948−3.5573−2.8364−2.5374Stableln (V)−3.2141−3.5381−2.9203−2.6371StableBy the analysis of the calculation results, we find that before and after the implementation of the SHKSC policy, the relationship between ln (RCSDI) and ln (V) is presented in Figure4. We find that ln (RCSDI) and ln (V) have a positive correlation.Figure 4
Relationship between ln (RCSDI) and ln (V) before the policy.By the analysis of the calculation results, we find that after the implementation of the SHKSC policy, the relationship between ln (RCSDI) and ln (V) is as mentioned below in Figure5. We find that ln (RCSDI) and ln (V) still have a positive correlation.Figure 5
Relationship between ln (RCSDI) and ln (V) after the policy.Table4 shows that before the implementation of the SHKSC policy, there is herding behavior of investors. The value of β1 is 0.4316, indicating that the average influence of ln (RCSDI) from the previous period on the value of the current period is 0.4316, with other factors unchanged. The β2 value is 0.0538, indicating that the average influence of the previous period’s ln (V) on the current period’s value is 0.0538 under the condition that other factors remain unchanged. The β3 value is 0.3945, which indicates that under the condition of other factors being constant, an increase of 1 unit of ln (V) will have an average impact on ln (RCSDI) of the current period of 0.3945.Table 4
Empirical test results before and after the implementation of the policy.
Coefficient valueβ0β1β2β3Before policy implementation−2.2374∗∗∗ (−11.4721)0.4316∗∗∗ (13.4239)0.0538∗∗∗ (3.2767)0.3945∗∗∗ (10.0653)After policy implementation−0.9311∗∗∗ (−6.3783)0.6135∗∗∗ (17.6539)0.0139∗ (1.9775)0.5583∗∗∗ (5.8621)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.After the implementation of the SHKSC policy, we find there still has obvious herding behavior. The value ofβ1 is 0.6135, indicating that the average influence of ln (RCSDI) from the previous period on the value of the current period is 0.6135, with other factors unchanged. The β2 value is 0.0139, indicating that the average influence of the previous period's ln (V) on the current period’s value is 0.0139 under the condition that other factors remain unchanged. The β3 value is 0.5583, which indicates that under the condition of other factors being constant, an increase of 1 unit of ln (V) will have an average impact on ln (RCSDI) of the current period of 0.5583. The results show that the relevant investors in China did not fully consider a lot of information in the market after the introduction of relevant policies. Upon the calculation and analysis of the correlation coefficient of ln (RCSDI), we find that after the implementation of the policy, the herding behavior of the investors has gradually increased.The possible reason is that the basic information disclosure mechanism of China’s stock market is not perfect. There is a significant asymmetry of information, which leads to some investors being unable to invest reasonably. They tend to follow the investment after analyzing the investment behavior of other investors. Compared with many mainland investors, they are prone to herding behavior.In reality, many investors, because of the lack of investment experience in China’s stock market, have less comprehensive investment philosophy and relevant knowledge when they enter the stock market to carry out investment behavior. Compared with the relevant information of investment stocks, investors tend to pay more attention to other investors. Because of the investors’ speculative psychology, these investors do not pay close attention to the relevant information of the stocks they need to invest in, which easily leads to herd behavior in the stock market.


## 3.4. Herding Behavior in Rising and Falling Stages

According to the previous comparative analysis of the herding behavior of different stocks in the stock market, the rising and falling behavior of stocks is calculated by two equations, which are as follows:(13)lnRCSDIt=β0UP+β1UPlnRCSDIt−1+β2UPlnVt−1+β3UPΔlnVt+εt,lnRCSDIt=β0DOWM+β1DOWMlnRCSDIt−1+β2DOWMlnVt−1+β3DOWMΔlnVt+εt.In the process of calculation, the data are divided into two parts. One is the rising stage, and the other is the declining stage. To improve the reliability of the calculation and the stationarity of the results, the ADF test is carried out on ln (RCSDI) and ln (V) of the two stages. Table5 shows the results of the ADF test.Table 5
ADF test results of rising stage and falling stage.
VariableADF1%5%10%ResultRising stageln (RCSDI)−6.8663−4.1732−3.2838−2.8632Stableln (V)−3.1293−3.5639−2.7897−2.4534StableFalling stageln (RCSDI)−7.0822−3.7182−3.0893−2.3455Stableln (V)−2.9265−3.8831−2.5889−2.4003StableBy the calculation test, we find that ln (RCSDI) and ln (V) have no unit root. Hence, the follow-up regression analysis can be carried out. Table6 shows the actual regression results.Table 6
Empirical test results of rising stage and falling stage.
Coefficient valueβ0UPβ1UPβ2UPβ3UPRising stage−3.6712∗∗∗ (−18.2042)0.1469∗∗∗ (4.3209)0.1734∗∗∗ (6.1712)0.1835∗∗∗ (6.8742)Coefficient valueβ0DOWMβ1DOWMβ2DOWMβ3DOWMFalling stage−3.5128∗∗∗ (−17.8382)0.2187∗∗∗ (7.3843)0.1692∗∗∗ (5.9739)0.2194∗∗∗ (8.3774)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.By the empirical analysis of variables, we find that in the rising stage of the foundation, the coefficients ofβ1UP, β2UP, and β3UP are 0.1469, 0.1734, and 0.1835, respectively. Hence, there is herding behavior in the investment market. When the stock price rises in the process of investment, there is a certain convergence of investors.In the descending stage of the foundation, the coefficients ofβ1DOWM, β2DOWM, and β3DOWM are 0.2187, 0.1692, and 0.2194, respectively. Compared with the rising stage of the stock price, the investor sentiment has a certain continuation in the declining stage, which is in line with the phenomenon of “slow rises and sharp drops.” When the stock price falls, the increase of the turnover indicates that there is a certain degree of herding behavior in China's stock market. By the analysis, we can find that the SHKSC policy cannot significantly reduce the herding behavior and probability of investors in the market. To a certain extent, it enhances the herding behavior of investors, resulting in increased volatility in the market.


## 3.5. Herding Behavior with Different Market Value

According to the division of whether the market value of the stock sample is more than 20 billion yuan, we find that there are 173 stocks with a market value of more than 20 billion yuan and 231 stocks with a market value of less than 20 billion yuan in Table7.Table 7
Empirical test results of herding behavior with different market value scale.
Coefficient valueβ0β1β2β3≥20 billion market value−1.8732∗∗∗0.5733∗∗∗0.1102∗∗∗0.6177∗∗∗(−12.0246)(28.0381)(8.9331)(12.8372)<20 billion market value−1.9321∗∗∗0.6066∗∗∗0.1208∗∗∗0.5638∗∗∗(−15.3044)(23.3752)(10.8463)(18.8372)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.According to the empirical analysis results of the model, we find there is obvious herding behavior. When the market value of the stocks invested by investors is less than 20 billion, the probability and degree of herding behavior of the investors are more obvious, and the market volatility of these stocks may be more significant. When the market value of stocks invested by investors exceeds 20 billion, investors tend to pay attention to the corresponding behavior of the investment “market maker” and pay more attention to the increase of different investment ranges. The main reason for this phenomenon may be that the professional analysis ability of Chinese investors is limited, and they do not fully understand the stock resources and environment in a short period of time.By the comparative analysis, we find that some stock investors in China have obvious speculative psychology and game psychology, and there is no reasonable long-term investment plan, which leads to obvious herding behavior in China’s stock market. Both Chinese mainland investors and Hongkong investors have a more obvious herding behavior, and the preference for stock market capitalization is not obvious.


## 3.6. Herding Behavior in Different Industries

The stock can be divided into several types according to different industries, including real estate industry, material industry, chemical industry, consumer retail industry, healthcare industry, financial industry, and so on. We analyze whether different investors have obvious industry investment preferences in the process of investment. Table8 shows the results of herding behavior in different industries.Table 8
Empirical test results of herding behavior in different industries.
Coefficient valueβ0β1β2β3Material industry−1.9239∗∗∗0.5391∗∗∗0.1231∗∗∗0.7927∗∗∗(−15.3843)(27.3048)(6.8481)(26.3744)Real estate industry−3.3124∗∗∗0.4301∗∗∗0.2849∗∗∗0.7391∗∗∗(−21.2338)(17.7483)(16.6319)(12.6362)Chemical industry−2.2031∗∗∗0.5033∗∗∗0.1899∗∗∗0.5663∗∗∗(−21.8287)(20.0981)(13.4263)(12.1208)Financial industry−1.2437∗∗∗0.7366∗∗∗0.1125∗∗∗1.2126∗∗∗(−9.0874)(37.6075)(8.8055)(19.6780)Consumer retail industry−2.1937∗∗∗0.6881∗∗∗0.1732∗∗∗1.1203∗∗∗(−15.0674)(23.0329)(9.8751)(14.4392)Healthcare industry−1.8374∗∗∗0.6375∗∗∗1.7732∗∗∗1.6453∗∗∗(−20.3742)(22.1516)(19.8377)(20.5361)Note:∗means significant at the level of 10%, ∗∗means significant at the level of 5%, and ∗∗∗means significant at the level of 1%.According to the empirical analysis results of the model, the six major industries mentioned above have significant herding behavior. The industries that were most significantly affected by the previous period’s yield are finance, healthcare, and material industries. It shows that most investors have a significant follow-up phenomenon in the process of stock investment, and there is no in-depth analysis of relevant industry information.


## 4. Conclusions

In this paper, through in-depth research on the changes in herding behavior in the Chinese stock market before and after the implementation of the SHKSC policy, the following conclusions are obtained: (1) under the background of implementation of the SHKSC policy, investors in the stock market have more significant herding behavior. (2) Related policies of SHKSC have not been able to learn from the herding behavior in the internal market of the stock market, however, to a certain extent, they make the stock market more volatile and strengthen the herd behavior. (3) Choosing the RCSDI model to analyze the herd behavior of investors in the process of rising and falling, we find that investors’ “killing down” is stronger than “chasing up.” (4) In the process of stock investment, investors do not have a significant investment preference for the market value of stocks and the investment industry.



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*Source: 7278023-2022-01-18.xml*