Good EPU or Bad EPU? Asymmetric Effects on Herding Across China’s Main, ChiNext, and STAR Markets

HRMARS - Purpose: This study challenges the conventional view of economic policy uncertainty (EPU) as a uniformly destabilizing force. It investigates the asymmetric effects of EPU on herding behavior across China's three major stock boards—the Main Board, ChiNext, and STAR Market—to determine whether it acts as a stabilizing mechanism or a speculative catalyst in different market contexts. Design/methodology/approach: This study employs panel regression analysis on monthly data from January 2011 to December 2023 for the Main Board, ChiNext and STAR Market. The empirical strategy examines the heterogeneous effects of the Chinese EPU index on herding across the three boards. The robustness of the baseline findings is verified through a dummy variable approach and a two-stage least squares (2SLS) estimation that addresses endogeneity. Findings: The results robustly support the core thesis of asymmetric effects. EPU significantly suppresses herding in the Main Board and ChiNext, consistent with a "stabilizing" role. In stark contrast, EPU exacerbates herding on the STAR Market. Crucially, this effect is driven specifically by a significant increase in buy-side herding, confirming its role as a catalyst for speculative purchasing. Research limitations/implications: A key limitation is the current inability to quantitatively distinguish between "good" and "bad" EPU, as existing indices capture only the magnitude, not the qualitative nature, of policy uncertainty. Future research could leverage artificial intelligence and natural language processing to classify policy, enabling a more precise measurement of its asymmetric impacts. Practical implications: Regulators should adopt market-tailored approaches: maintaining stability-enhancing transparency for the Main Board and ChiNext, while implementing targeted oversight on speculative trading in the STAR Market to curb the herding amplified by policy uncertainty. Originality/value: This study addresses a notable gap in the literature by systematically examining the impact of economic policy uncertainty (EPU) on herding behavior—a relationship that has received limited attention, particularly from a heterogeneous market perspective. It offers novel insights by revealing the asymmetric effects of EPU across China's three major boards, thereby enriching our understanding of how institutional context and market microstructure shape divergent investor responses to policy shocks.