Institutional Herding and Its Price Impact: Evidence from the Corporate Bond Market

Fang Cai, Song Han, Dan Li and Yi Li
Additional contact information
Fang Cai: https://www.federalreserve.gov/econres/fang-cai.htm
Yi Li: https://www.federalreserve.gov/econres/yi-li.htm

No 2016-091, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Among growing concerns about potential financial stability risks posed by the asset management industry, herding has been considered as an important risk amplification channel. In this paper, we examine the extent to which institutional investors herd in their trading of U.S. corporate bonds and quantify the price impact of such herding behavior. We find that, relative to what is documented for the equity market, the level of institutional herding is much higher in the corporate bond market, particularly among speculative-grade bonds. In addition, mutual funds have become increasingly likely to herd when they sell, a trend not observed among insurance companies and pension funds. We also show that bond investors herd not only within a quarter, but also over adjacent quarters. Such persistence in trading is largely driven by funds imitating the trading behavior of other funds in the previous quarter. Finally, we find that there is an asymmetry in the price impact of herding. While buy herding is associated with a permanent price impact that is consistent with price discovery, sell herding results in transitory yet significant price distortions. The price destabilizing effect of sell herding is particularly strong for high-yield bonds, small bonds, and illiquid bonds and during the recent global financial crisis.

Keywords: Corporate Bond; Herding; Institutional Investors; Liquidity; Return Reversal (search for similar items in EconPapers)
JEL-codes: G01 G02 G12 G14 G20 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2016-10
New Economics Papers: this item is included in nep-fmk and nep-mst
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http://www.federalreserve.gov/econresdata/feds/2016/files/2016091pap.pdf (application/pdf)

Related works:
Journal Article: Institutional herding and its price impact: Evidence from the corporate bond market (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-91

DOI: 10.17016/FEDS.2016.091

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