Asset Price Effects of Peer Benchmarking: Evidence from a Natural Experiment

30 Pages Posted: 20 Apr 2016

See all articles by Sushant Acharya

Sushant Acharya

Federal Reserve Banks - Federal Reserve Bank of New York

Alvaro Pedraza

World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: April 14, 2015

Abstract

This paper estimates the effects of peer benchmarking by institutional investors on asset prices. To identify trades purely due to peer benchmarking as separate from those based on fundamentals or private information, the paper exploits a natural experiment involving a change in a government imposed underperformance penalty applicable to Colombian pension funds. This change in regulation is orthogonal to stock fundamentals and only affects incentives to track peer portfolios allowing the authors to identify the component of demand due to peer benchmarking. The authors find that peer effects among pension fund managers generate excess in stock return volatility, with stocks exhibiting short-term abnormal returns followed by returns reversal in the subsequent quarter. Additionally, peer benchmarking produces an excess in comovement across stock returns beyond the correlation implied by fundamentals.

Keywords: Securities Markets Policy & Regulation, Capital Markets and Capital Flows, Capital Flows, Economic Insecurity, Non Bank Financial Institutions

Suggested Citation

Acharya, Sushant and Morales, Alvaro, Asset Price Effects of Peer Benchmarking: Evidence from a Natural Experiment (April 14, 2015). World Bank Policy Research Working Paper No. 7239, Available at SSRN: https://ssrn.com/abstract=2594575

Sushant Acharya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Alvaro Morales

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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