Coordinated Noise Trading: Evidence from Pension Fund Reallocations

Zhi Da, Borja Larrain (), Clemens Sialm and José Tessada

No 22161, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document a novel channel through which coordinated noise trading exerts externalities on financial markets dominated by institutional investors. We exploit a unique set of events where Chilean pension fund investors followed an influential financial advisory firm that recommended frequent switches between equity and bond funds. The recommendations, which mostly followed short-term trends, generated large and coordinated fund flows. These flows resulted in substantial price pressure and increased volatility in financial markets. Pension funds increased cash holdings as a response. Our findings suggest that giving retirement savers unconstrained reallocation opportunities may exert negative externalities on financial markets.

JEL-codes: F32 G02 G11 G12 G14 G15 G18 G23 G28 H31 H55 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-age, nep-mst and nep-net
Note: AG AP CF IFM ITI PE
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