Deconstructing Herding : Evidence from Pension Fund Investment Behavior
Pension funds have been expected to invest in a wide range of securities and provide liquidity to domestic capital markets since they are the most sophisticated investors, with plenty of resources to gather private information and manage portfolios...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110622091607 http://hdl.handle.net/10986/3464 |
| Summary: | Pension funds have been expected to
invest in a wide range of securities and provide liquidity
to domestic capital markets since they are the most
sophisticated investors, with plenty of resources to gather
private information and manage portfolios professionally.
However, by analyzing unique, monthly asset-level data from
the pioneer case of Chile, this paper shows that pension
funds tend to herd. This is consistent with pension funds
copying each other in their investment strategies as a way
to extract information, boost returns, and reduce risk. The
authors compute measures of herding across asset classes
(equities, government bonds, and private sector bonds) and
at different pension fund industry levels. The results show
that pension funds herd more in assets for which they have
less market information and when risk increases. Moreover,
herding is more prevalent across funds that narrowly compete
with each other, that is, when comparing funds of the same
type across pension fund administrators. There is much less
herding within pension fund administrators and across
pension fund administrators as a whole. This herding pattern
is consistent with incentives for managers to be close to
industry benchmarks, which might be driven by both market
forces and regulation. |
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