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 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.

Bibliographic Details

Main Authors:	Raddatz, Claudio, Schmukler, Sergio L.
Language:	English
Published:	2011-06-01
Subjects:	ACCOUNTING, ACTIVE ASSETS, ALTERNATIVE INVESTMENT, ARBITRAGE, ASSET ALLOCATION, ASSET CHARACTERISTICS, ASSET CLASS, ASSET CLASSES, ASSET MANAGEMENT, ASSET MANAGERS, ASSET TYPE, ASSETS UNDER MANAGEMENT, ASYMMETRIC INFORMATION, BANK POLICY, BENCHMARK, BENCHMARK YIELD, BENCHMARK YIELD CURVE, BENCHMARKS, BID, BOND, BOND AUCTIONS, BOND FUNDS, BOND RATINGS, CAPITAL FLOWS, CAPITAL MARKET, CAPITAL MARKET ACTIVITY, CAPITAL MARKET DEVELOPMENT, CAPITAL MARKET REFORMS, CAPITAL RAISING, CAPITALIZATION, CENTRAL BANK, CONFLICTS OF INTEREST, CONTRACTUAL SAVINGS, CONTRACTUAL SAVINGS INSTITUTIONS, CORPORATE BOND, CORPORATE BOND ISSUERS, CORPORATE BONDS, CORPORATE GOVERNANCE, CORPORATE INVESTMENT, COUPONS, DEBT, DEBT MARKETS, DEBTOR, DEPOSITS, DERIVATIVES, DEVELOPING COUNTRIES, DOMESTIC CAPITAL, DOMESTIC CAPITAL MARKETS, DOMESTIC EQUITIES, DOMESTIC EQUITY, EMERGING MARKET, EMERGING MARKET DEBT, EMERGING MARKETS, EMERGING STOCK MARKET, EQUITIES, EQUITY HOLDINGS, EQUITY MARKET, EQUITY MARKET CAPITALIZATION, EQUITY MARKETS, EQUITY MUTUAL FUNDS, EQUITY PORTFOLIO, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL MANAGEMENT, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL STUDIES, FINANCIAL SUPPORT, FINANCIAL SYSTEMS, FIXED INCOME, FIXED INCOME ASSETS, FIXED INCOME MARKETS, FIXED INCOME SECURITIES, FLOW OF FUNDS, FOREIGN ASSETS, FOREIGN INVESTMENT, FOREIGN INVESTMENTS, FOREIGN MUTUAL FUNDS, FUND INDUSTRY, FUND MANAGEMENT, FUND MANAGERS, FUND PORTFOLIOS, FUND TYPE, FUND TYPES, GLOBALIZATION, GOVERNMENT BOND, GOVERNMENT BONDS, GOVERNMENT PAPER, GROUPS OF FUNDS, INCOME INSTRUMENTS, INDIVIDUAL ACCOUNT, INDIVIDUAL ACCOUNTS, INDIVIDUAL INVESTMENTS, INDIVIDUAL INVESTORS, INSTITUTIONAL INVESTOR, INSTITUTIONAL INVESTORS, INSTRUMENT, INSURANCE, INSURANCE COMPANIES, INTERMEDIATE MATURITIES, INTERNATIONAL BANK, INTERNATIONAL DEVELOPMENT, INTERNATIONAL ECONOMICS, INVESTABLE ASSETS, INVESTING, INVESTMENT BEHAVIOR, INVESTMENT DECISION, INVESTMENT DECISIONS, INVESTMENT FUNDS, INVESTMENT INSTRUMENTS, INVESTMENT PATTERN, INVESTMENT PATTERNS, INVESTMENT REGULATIONS, INVESTMENT RESTRICTIONS, INVESTMENT STRATEGIES, INVESTMENT STRATEGY, INVESTMENT VEHICLES, INVESTOR BASE, ISSUANCE, ISSUANCES, LEVEL OF RISK, LIFE INSURANCE, LIFE INSURANCE COMPANIES, LIQUIDITY, MACROECONOMIC POLICIES, MANAGEMENT COMPANIES, MARKET DEPTH, MARKET EVIDENCE, MARKET INFORMATION, MARKET LIQUIDITY, MARKET PARTICIPANTS, MARKET PRICES, MARKET TRANSPARENCY, MARKET VALUE, MARKET VOLATILITY, MATURITIES, MATURITY, MATURITY DATE, MOMENTUM STRATEGIES, MOMENTUM TRADER, MOMENTUM TRADING, MORTGAGE, MORTGAGE BOND, MORTGAGE BONDS, MORTGAGE-BACKED SECURITIES, MUTUAL FUND, MUTUAL FUND MANAGERS, MUTUAL FUND STRATEGIES, MUTUAL FUNDS, OPPORTUNITY COST, OUTSTANDING CORPORATE BONDS, OVERALL PORTFOLIO, PAST PERFORMANCE, PENSION, PENSION FUND, PENSION FUND INVESTMENT, PENSION FUND MANAGERS, PENSION FUNDS, PENSION REFORM, PENSION REFORMS, PENSION SYSTEM, PENSIONS, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIO ALLOCATION, PORTFOLIO ALLOCATIONS, PORTFOLIO COMPOSITIONS, PORTFOLIO HOLDING, PORTFOLIO INVESTMENTS, PORTFOLIO PERFORMANCE, PORTFOLIOS, PRICE FORMATION, PRIMARY MARKETS, PUBLIC OFFERINGS, PUBLIC SAVINGS, PUBLIC SECTOR BONDS, RATE OF RETURN, REAL RATE OF RETURN, REGULATORY CONSTRAINTS, REGULATORY FRAMEWORK, RESERVE, RESERVES, RETAIL INVESTORS, RETIREMENT INCOME SECURITY, RETURN, RETURN VOLATILITY, RETURNS, RISK PARAMETERS, RISK PROFILES, SECONDARY MARKETS, SECURITIES, SECURITIES MARKETS, SET OF FUNDS, SINGLE PORTFOLIO, SOPHISTICATED INVESTORS, STOCK EXCHANGE, STOCK MARKET, STOCK MARKET DEVELOPMENT, STOCK MARKET INDEX, STOCK MARKET LIQUIDITY, STOCKS, TRADING, TRADING DAYS, TRANSACTION, TRANSACTION COSTS, TRANSFER RISK, TRANSPARENCY, TURNOVER, TURNOVER RATIO, TURNOVER RATIOS, TYPES OF FUNDS, UNDERLYING ASSETS,
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 https://hdl.handle.net/10986/3464
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