Abstract

     Using daily credit default swap (CDS) data, we find a positive relation between corporate credit risk and unexpected monetary policy shocks during FOMC announcement days. Positive shocks to interest rates increase the expected loss component of CDS spreads as well as a risk premium component. However, not all firms respond in the same manner. We show that firm-level credit risk is an important driver of the monetary policy response, both in credit and equity markets, and its role is not diminished by the inclusion of other risk proxies. A stylized corporate model of monetary policy, investment, and financing rationalizes our findings.

Introduction

     Understanding the transmission of interest rate shocks to corporations is of paramount importance to policymakers and economic researchers, as corporate borrowing is widely used to fund investment, production, labor, and other real activities. While economic theory suggests that firms obtain credit at a premium that compensates for default risk, it is still widely debated as to how corporate credit risk is affected by monetary policy. This transmission mechanism has played a crucial role in policy responses over the last two decades.

     In this paper, we connect unexpected interest rate movements to fluctuations in credit risk to shed more light on this transmission mechanism. To measure credit risk at the firm-level, we take advantage of daily quoted prices on the corporate, single name, credit default swap (CDS) market. Using CDS rates allows us to conveniently separate the two main components of credit spreads, an expected loss component and a credit risk premium, and independently study their reaction to monetary policy surprises.2

Conclusion

     Monetary policy surprises significantly affect firm-level credit risk. Consistent with recent evidence, we document that both components of firm-level credit risk (i.e., the expected loss and the risk premium components) and equity prices respond more to monetary policy surprises when firms have higher credit risk, as measured by their CDS spreads. Additionally, the importance of firm-level credit risk for the propagation of monetary policy shocks does not diminish when we contemporaneously control for book leverage and market size, two characteristics commonly associated with firm-level risk.

     To rationalize the heterogenous response of credit risk and the noisiness of leverage as a risk indicator, we construct a stylized three-period model that features endogenous financing and investment decisions together with a monetary authority that sets short term interest rates. Central to our results is an intermediary pricing kernel for which larger prices of risk related to interest rate shocks correspond to larger responses of credit spreads and real quantities. We show in the model economy that firms with higher ex-ante spreads, that are closer to default, are those that are more sensitive to interest rate shocks. Meanwhile, firms with higher leverage are able to afford such debt capacity due to their fundamental strength and, as a result, their credit spreads are less sensitive to monetary policy shocks.

     Overall, our work suggests that a simple and intuitive measure such as leverage might not be as effective as a more direct measure of credit risk such as CDS spreads, to understand the pass through of monetary policy at the firm level.

Introduction

Theoretical framework

Methodology

Results

Discussion

References

Abstract

Purpose – Changes in consumers’ awareness of interest rates (deposits and loans) are important for making financial decisions, particularly in the banking industry. However, little is known about the effect of consumer awareness on customer orientation and loyalty. The purpose of this paper is to examine how changes in consumers’ awareness of interest rates in Korea can influence customer loyalty, considering banks’ efforts to improve customer orientation. The authors explicitly rationalize the fact that consumers’ awareness of interest rates can play an important role in moderating the strength of the relationship between customer orientation and loyalty. Design/methodology/approach – The data were collected from participants (n ¼ 327) who had made banking transactions based on their real income in Seoul. Participants mainly focused on personal loans and debts, and most people had banked with a specific bank (one of the main Korean banks) for longer than three years. The authors tested the effect of interest rates using two methodologies, namely, a field study using SEM and an experimental design.
Findings – The study tested these relationships with survey data and two simulated experiments. The findings indicated that the influence of customer orientation on customer loyalty decreased with the increase in loan interest rate awareness. Moreover, the customer orientation-loyalty link weakened with the increase in awareness of central bank base rates. Conversely, the awareness that loan rates were decreasing strengthened the relationship.
Research limitations/implications – Banks need to know the importance of periodic consultation services with valuable consumers who transact with one or more banks because changes in the consumer awareness of interest rates influence customer loyalty (or switching behavior), particularly when their awareness of loan interest rates increases.
Originality/value – This paper is, to the best of the authors’ knowledge, the first to investigate the consequence of such a change in consumers’ awareness of both deposit and loan interest rates with regard to the relationship between customer orientation and loyalty.

Introduction

A customer-focused business culture is widely recognized to strengthen successful organizations and be closely related to customer loyalty (Agarwal et al., 2003). The banking service sector particularly emphasizes customer orientation to increase customer loyalty ( Johlke and Lyer, 2017; Pousa et al., 2018); however, such loyalty can vary when economic situations change rapidly (Hampson and McGoldrick, 2015). For example, when the personal loan interest rate in Korea dropped from 4.10 percent in December 2013 to 3.78 percent in August 2014 (The Bank of Korea, 2015), bank loan customers switched to other competitive banks (Ha, 2011). This case follows the explicit assumption that debt customers strongly consider switching actions when competing banks offer lower loan interest rates (Ioannidou and Ongena, 2010). Previous studies on consumer financial decision making that were reported in a special issue of the Journal of Marketing Research (JMR, 2011) were primarily focused on debt account aversion (Amar et al., 2011) or increasing savings behavior for retirement (Hershfield et al., 2011). In this new study, we explore whether customers are sensitive to interest rate levels and, specifically, whether a strong link exists between customer orientation and loyalty. Many people struggle with repaying their debts during periods of economic downturn (e.g. home mortgages, credit card loans, and personal loans across financial markets), which thereby results in switching behaviors. Identifying the different roles of interest rates will explain how two moderators (deposit and loan interest rates) can significantly affect customer orientation and, subsequently, customer loyalty. This approach offers a means for banks to re-evaluate their past performance and redesign their current strategies positively. This problem of maximizing outcomes across the entire product category shows how customer orientation influences customer loyalty when consumers’ awareness of bank interest rates (affecting deposits or loans) is low or high. Certainly, the interest rates that a financial institution charges its customers can negatively affect the institution’s competitiveness, and consequently, certain customers will leave, thus damaging the institution’s performance in terms of customer loyalty (Ha, 2011). Similarly, whether or not interest rates are consumers’ main concern from a psychological perspective remains a question. However, the effect of the relationship may vary when choosing between banks for a loan because banking customers may be insufficiently sensitive to interest rates when deciding between loans (Shu, 2010). However, customers with large deposits or loans become considerably sensitive to interest rates as they may represent significant gains or losses (Ha and Choi, 2010). Although one may argue that rates always matter (Mild et al., 2015), this study strongly emphasizes interest rates in financial services when justifying changes in customer orientation and loyalty.

I- Introduction

II- Determinants of Emerging Market Capital Flows

III- The Belt and Road Initiative and the Prevention of Financial Risks in Emerging Countries

V- Conclusion

References

Abstract

Since the end of 2015, the US Federal Reserve has raised its benchmark interest rate nine times. This has led to capital outflows and asset depreciation in many emerging market economies. The present paper examines the factors that determine the financial volatility of emerging markets in the face of external shocks. By calculating the capital flows of 30 emerging markets from 1990 to 2018 and conducting panel regression, this paper finds that countries with good infrastructure facilities, a sound banking system and high economic growth have significantly lower cross-border financial risks. An implication from the empirical analysis is that emerging countries would benefit greatly by actively taking part in the Belt and Road Initiative. The framework of the Belt and Road Initiative allows emerging countries better access to China’s massive consumer market to promote trade and long-term growth. Their quality of infrastructure can be improved through cooperation with China in infrastructure investment. They can also jointly establish a cooperative financial framework to enhance regional financial stability. These strategies will reduce systematic financial risks and counteract the negative impacts of US interest rate hikes.

Introduction

In December 2015, the US Federal Reserve raised the benchmark interest rate for the first time since introducing quantitative easing policies in 2008. The rate was changed after an increase in US economic growth from 2.6 percent in 2014 to 2.9 percent in 2015. Since then, the US economy has witnessed consistent economic recovery. There has been an upward trend in GDP growth, from 1.5 percent in 2016 to 2.9 percent in 2018 and the labor market has been stable, with the unemployment rate hitting 3.5 percent, the lowest level in the past 50 years.1 Much cross-border capital flowed from emerging economies to the US, pushing up the exchange rate of the US dollar. Against this backdrop, the Federal Reserve raised the benchmark rates once in 2016, three times in 2017 and four times in 2018. The current benchmark rate has returned to a normalized level of 2.25–2.5 percent. The US interest rate hike had negative spillover effects on emerging market economies. In 2018, the Chinese RMB and Indian rupee depreciated against the US dollar by 5.4 and 8.3 percent, respectively (Figure 1). The Turkish Iira, Brazilian real and South African rand depreciated more violently, approximately 28.5, 14.6 and 13.9 percent, respectively, in the same year. Another spillover effect of the tighter US monetary policy was the panic in emerging markets. As a result of pessimistic investor expectations, interest rates in the bond markets surged, while in some emerging economies the stock markets collapsed.

 Introduction

The relationship between monetary policy and the real economy is identified through the influence of monetary transmission channels on macroeconomic variables especially economic growth, inflation and investment. The rule is simple, the more monetary policy affects the economy, the more effective it is. In other words, the effectiveness of monetary authorities’ decisions supposes the existence of a relationship between a set of monetary policy instruments, especially the policy rate, and macroeconomic performances through different transmission channels. Main channels through which monetary policy could impact economic activities are interest rate; money supply; bank credit; exchange rate; asset price and expectation channel (Bernanke and Gertler, 1995; Taylor, 1995, Mishkin, 1996Taylor, 1995, Mishkin, 1996). Recent studies have focused on some topics related to transmission channels like the effect of the financial crisis, unconventional monetary policy and capital inflows in emerging economies (Mishkin, 2009; Borio and Zhu, 2012; Cevik and Teksoz, 2012; Chandra and Unsal, 2012; Kohlscheen and Miyajima, 2015). Besides, after the development of Islamic finance in the 2000th, largely through the rapid expansion of Islamic banks, the effectiveness of monetary transmission mechanism (MTM) was challenged for the countries where Islamic banks are present. In these countries, in which a dual monetary system is emerging, a growing number of empirical studies examined the monetary transmission through Islamic bank channels (Zaheer et al., 2013; Ergeç and Arslan, 2013, Majid and Hasin, 2014; Akhatova et al., 2016; Zulkhibri and Sukmana, 2017). In reference to Sharia rules, Islamic banks institutions are free interest rate and fundamentally different from conventional banks. The differences mostly well-known through the principles of Sharia are based mainly on profit and loss sharing (PLS) principle and asset backing principle. Applying both principles on banking intermediation make assets financing and their pricing close to real economy. Nonetheless, given that debt financing contract, being the main Islamic banking asset, is quite similar to conventional credit, the conduct of monetary policy through interest rate instrument is also expected to influence Islamic banks financing. In fact, in most countries where Islamic banks operate, monetary policy uses interest rate instrument of monetary market regulation as a benchmark of credit financing rate. Besides, in dual financial system, the presence of strongly competitive conventional banks, the inexistence of benchmark pricing of Islamic bank products and the underdevelopment of Islamic money markets,1 make Islamic banks behaviour, in term of debt financing, heavily influenced by monetary policy shocks and conventional bank activity. On the other side, given this incompatible environment with their ethical background, the presence of Islamic banks is likely to limit the ability of monetary policy to influence their financing debt volume making Islamic banking channel less effective despite its dependence on interest rate. In fact, Islamic banks, mainly through the use of profit sharing investment accounts (PSIA), seek to maintain debt financing level outside the influence of conventional monetary policy and to mitigate the undesirable effect of interest rate changes. The Sharia compliance of PSIA as loss absorbent product based on PLS principle with different maturities and currencies explains its importance to play multiples roles.

1- Introduction

2- Theory and hypothesis development

3- Research design

4- Results

5- Conclusion

References

Abstract

The objective of this paper is to evaluate whether dividend imputation, whereby tax credits may be passed on to shareholders for corporate tax paid, impacts corporate tax avoidance. This is undertaken with a pooled cross-sectional research design evaluating differences in tax avoidance across firms where there are significant differences in corporate tax avoidance incentives. Specifically, potential differences arise between firms paying dividends with tax credits, paying dividends without tax credits, and not paying dividends. Results suggest that firms paying dividends with tax credits attached are less likely to engage in tax avoidance with an average cash effective tax rate up to 16.9 percentage points higher than firms that pay dividends without tax credits, and up to 14.7 percentage points higher than firms that do not pay dividends at all. Accordingly, this provides insights into the effectiveness of dividend imputation in mitigating corporate tax avoidance, as well as providing support for the continuance of dividend imputation in Australia. Additionally, a positive association is found to exist between outside directors and corporate tax avoidance, extending to firms paying dividends with tax credits where dividend imputation is expected to mitigate such a relation. In combination, these results suggest heterogeneity of costs and benefits of tax avoidance and this is a challenge in evaluating corporate tax aggressiveness generally, and the impact of corporate governance on corporate tax avoidance in particular.

Introduction

The literature suggests that dividend imputation may be associated with lower levels of tax avoidance. However, there are numerous limitations in these studies. Amiran, Bauer and Frank (2016) rely on a cross country design, and both Wilkinson, Cahan and Jones (2001) and Ikin and Tran (2013) use limited samples which are unlikely to be representative of the overall population. Further, all three papers lack a theoretical foundation linking tax avoidance and dividend imputation, and provide no evidence of economic significance. Amiran et al. (2016) in particular, and with little justification, implicitly assume that under dividend imputation, managers in all firms will not engage in tax avoidance, as it is ineffective in increasing shareholders‘ wealth (Lasfer, 1996; Amiran et al., 2016). As a consequence, they ignore differences from the impact of dividend imputation across firms, and in particular, firms not paying dividends, as the effects of tax-induced dividend clienteles and the constraints on the impact of imputation are not considered. The objective of this paper is to evaluate corporate tax avoidance separately across firms paying dividends with tax credits, dividends without tax credits, and not paying dividends, where significant differences in the impact of dividend imputation on the incentives for corporate tax avoidance exist. 1 Additionally, this study evaluates the tax avoidance strategies available in an imputation setting that are in the best interests of shareholders, by controlling for outside director monitoring.

In comparison to bank financing, public debt market may allow firms to more readily match maturity and risk structures between their assets and liabilities. We test whether new issuers on the European corporate bond markets experience a change in their interest rate sensitivity upon their bond issuance. We find that stock returns have become significantly less sensitive to interest rate fluctuations for firms that enter the publicly traded bond market. Our findings support the notion that firms manage their interest rate risk with new debt issues.

Introduction

While interest rate risk management is mostly studied within banking industry, non-financial firms also view interest rate exposures and hedging of them to be of utmost importance (Graham and Harvey, 2001; Bodnar et al., 2013). Fast growth ofthe European corporate bond markets since the euro introduction has provided European firms with an expanded set of opportunities to manage their interest rate exposures (Korkeamaki, 2011). We study whether European firms’ interest rate sensitivity changes when they enter the corporate bond market. Banks have traditionally been the dominant source of debt financing for European non-financial firms. In a bank-dominated financial market, firms’ access to fixed rate funding tends to be limited, as bank financing comes predominantly in floating rate (Altman et al., 2010; Vickery, 2008; Faulkender, 2005).1 Limited access to fixed rate financing complicates firms’ efforts to match the interest rate sensitivity of their liabilities with that of their assets. Our work is related to the literature regarding the choice between bank financing and arm’s length financing via public markets. Diamond (1991) and Bolton and Freixas (2000) emphasize the monitoring role of bank lenders. Both papers predictthat high quality firms choose to use arm’s length debt, whereas lower-quality firms use bank debt due to its monitoring benefits. In a more recent paper, Rauh and Sufi (2010) explore the parallel use of bank debt and public debt. Their results provide further supportfor the importance of bank monitoring. They find that firms with public debt access continue to use bank debt. However, bank lending may also change its character when banks face increased competition from public marketlending. Boot and Thakor (2000) model suggests that with increased competition from the public capital market, banks reduce their investment in information acquisition. Part of that may be driven by banks’ need to cut costs as they face pressure to lower the cost of their lending, due to capital market competition (Hale and Santos, 2009) Boot and Thakor (2000) even question whether relationship-based European banking model will survive the growth in corporate bond market. Korkeamaki (2011) reports a significant change in interest rate sensitivity at the market level in Europe following the euro introduction, and he attributes the observation to the corporate bond market. We explore this issue further. Whereas Korkeamaki (2011) studies interest rate sensitivity of the European market indices and notes that a reduction in their interest rate sensitivity coincides with growth of European corporate bond issuance, our main contribution is that we use an identification strategy that specifically relates changes in interest rate sensitivity to bond IPOs at the firm level.

Baumol (1952) and Tobin (1956) claimed that as interest rates fall corporations will hold more cash due to the lower opportunity cost. With interest rates at 40 year lows, it leaves one to wonder if this negative relationship has held over time. The primary contribution of this paper is that it is the first extensive empirical study of the relationship between interest rates and cash holdings in the United States. While theoretical relationships were proposed in the 1950’s, they were not examined empirically. Rather than simply including a measure of interest as a control variable, it is the primary focus of this paper. In addition to empirically testing for the relationship between cash holdings and interest rates, the methodology and variables capturing cash holdings are distinguished from recent papers on corporate cash holdings. The relationship between cash holdings and interest rates is tested using a random effects threshold model, which distinguishes the relationship over different ranges of interest rates. To emphasize why it is necessary to control for varying interest rates, Fig. 1 plots the federal funds rate from January 1970 until December 2014. During the 1970’s, rates varied from 4.43 to 11.19 %. This is the only time during the sample where we see a uniform increase in rates. Rates reached a peak at 16.38 % in 1981 but subsequently declined to levels seen during the 1970’s. In the 1990’s, rates continued to decline, but at a slower pace than was experienced during the 1980’s. Finally, during the 2000’s and the most recent decade, rates have continued to decline even further to 0.09 % leaving interest rates at the lowest levels experienced over the last 40 years. Because of the variation in rates, the data are divided into interest rate ranges that are found by searching for thresholds in the interest rate series. This allows us to see if the negative relationship holds in the face of the dramatic fluctuation that interest rates experienced during these times.

On October 17th, 2014, Federal Reserve Chairwoman Janet Yellen spent significant time discussing income inequality in the United States at a Boston Federal Reserve Conference on Economic Opportunity and Inequality. She stated: ‘‘. . .. . .The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then. It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”2 Federal Reserve officials have often discussed income inequality in speeches, however, there is not a consensus regarding the degree to which income inequality should be a concern for the Federal Reserve. Chairman Alan Greenspan in 1998 stated: ‘‘. . .. . ..We need to ask, for example, whether we should be concerned with the degree of income inequality if all groups are experiencing relatively rapid gains in their real incomes, though those rates of gain may differ. And, we cannot ignore what is happening to the level of average income while looking at trends in the distribution. In this regard, our goal as central bankers should be clear: we must pursue monetary conditions in which stable prices contribute to maximizing sustainable long-run growth. Historically, the primary channel that the central bank could redistribute wealth was thought to be the inflation rate. Inflation that was higher than the expected inflation rate redistributed wealth from creditors to debtors. However, given that part of the Federal Reserve’s mandate is a low unemployment rate, the Federal Reserve has often lowered interest rates in attempts to stimulate the economy. As such, while lowering interest rates may stimulate the economy, it is not clear that all income groups experience equal growth in incomes because of the policy stimulus. This paper explores whether there is a debt and equity channel through which changes in interest rates may affect income inequality through either increased household debt or by increasing the value of financial assets that are owned primarily by high income families.

مقاله سال 2017

As a measure of cost of capital and profit in modern financial market, interest rate is a top priority for any country. Interest rates have become the core content of the economic research not only for its nature of value measurement in bond market, but also for its importance in monetary policy transmission. Changes in interest rates generally reflect the tightness of the monetary policy of a country. In this way, interest rates significantly influence money supply, lending, stock market, and real economy in the end [1].

Earlier on, interest rates (prices of bonds) and prices of other financial properties are believed to follow random walk [2, 3]. Thus price changes are assumed to obey Gaussian distributions. However, recent researches prove that price changes follow a complex distribution with a more obvious peak and fatter tails than Gaussian’s [4, 5, 6]. It states in some economists’ and physicists’ research that interest rates fluctuation shows some complex properties, such as long range correlation or memory [7, 8, 9], fractals/multifractals [10, 11], and so on.

Long-range correlations appear in several kinds of equities in literature [12, 13, 14], but only a few of them focus on bond market. Backus and Zin (1993) [15]seem to be the first to consider the existence of long-range memories in interest rates. They use a fractional difference model to study the features of yields on US government bonds with modern asset pricing theory and find the evidence of long memory in the 3-month zero-coupon rate. Cajueiro and Tabak (2006) [10]test for long-range dependence in the term structure of London Interbank offered rates (LIBOR), which are considered to be the benchmark interest rates in European countries. They found significant evidence which shows that interest rates have a strong degree of long-range dependence and furthermore a multifractal nature. And they also suggest that the pricing of interest rates derivatives and fixed income portfolio management should take long memories into account.

مقاله سال 2017

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.