Deconstructing Herding: Evidence from Pension Fund Investment Behavior

54 Pages Posted: 20 Apr 2016

See all articles by Claudio E. Raddatz

Claudio E. Raddatz

Central Bank of Chile; World Bank

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Date Written: June 1, 2011


Pension funds have been expected to invest in a wide range of securities and provide liquidity todomestic 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.

Keywords: Debt Markets, Mutual Funds, Emerging Markets, Investment and Investment Climate, Economic Theory & Research

Suggested Citation

Raddatz, Claudio E. and Schmukler, Sergio, Deconstructing Herding: Evidence from Pension Fund Investment Behavior (June 1, 2011). World Bank Policy Research Working Paper No. 5700. Available at SSRN:

Claudio E. Raddatz (Contact Author)

Central Bank of Chile ( email )

United States

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Sergio Schmukler

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)


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