The Interplay Between Interest Rates, Volatility, and Herding: Insights from the Chinese Shanghai Stock Market

This study examines the intricate relationship between interest rates, herding behaviour, and volatility’s mediating role within the Chinese Shanghai Stock Exchange context. Furthermore, this study investigates the mediating effect of market volatility using both realised volatility and the Parkinson estimator. A notable finding of this study is the identification of full mediation by volatility, which emphasises the critical role of market volatility in amplifying the effects of interest rates on investor behaviour. The Baron and Kenny mediation model provides a structured framework for comprehensively analysing the mediation process. The theoretical implications encompass contributions to information-based herding theory and the Efficient Market Hypothesis, enriching our understanding of market dynamics. This study has practical implications for market participants, policymakers, and regulators, highlighting the need for a holistic approach to interest rates that considers its potential impact on market behaviour through volatility.