The Price Impact of Institutional Herding

Amil Dasgupta, Andrea Prat and Michela Verardo

The Review of Financial Studies, 2011, vol. 24, issue 3, 892-925

Abstract: We develop a simple model of the price impact of institutional herding. The empirical literature indicates that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We offer a theoretical resolution to this dichotomy. In our model, career-concerned money managers trade with security dealers endowed with market power and exhibit an endogenous tendency to imitate past trades. This tendency is exploited by dealers and thus affects prices. In equilibrium, institutional herding positively predicts short-term returns but negatively predicts long-term returns. Our article also generates several new, testable predictions that link institutional herding with the time-series properties of returns and volume. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2011
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Working Paper: The Price Impact of Institutional Herding (2010)
Working Paper: The Price Impact of Institutional Herding (2010)
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