Institutional Herding in the Corporate Bond Market

47 Pages Posted: 8 Feb 2013

See all articles by Fang Cai

Fang Cai

Federal Reserve Board

Song Han

Federal Reserve Board - Division of Research and Statistics

Dan Li

Federal Reserve Board

Multiple version iconThere are 3 versions of this paper

Date Written: December 1, 2012

Abstract

We find substantial herding in U.S. corporate bonds among bond fund managers, much higher than that previously documented for the equity market. Herding is generally stronger among illiquid bonds, and buy herding and sell herding are driven by different factors. In particular, sell herding increases on negative news about bond ratings and corporate earnings. Interestingly, increases in ex-post transparency in corporate bond trading through Trade Reporting and Compliance Engine (TRACE) led to higher buy herding but not to higher sell herding. Finally, we find significant return reversals in the post-herding quarters, especially for sell herding and for junk bonds. Price reversal is most prominent when funds herd to sell illiquid bonds, which suggests that temporary price pressure is the reason behind price reversal.

Keywords: corporate bond, herding, liquidity, institutional investors

JEL Classification: F21, G11, G14, G15

Suggested Citation

Cai, Fang and Han, Song and Li, Dan, Institutional Herding in the Corporate Bond Market (December 1, 2012). FRB International Finance Discussion Paper No. 1071. Available at SSRN: https://ssrn.com/abstract=2210430 or http://dx.doi.org/10.2139/ssrn.2210430

Fang Cai (Contact Author)

Federal Reserve Board ( email )

Office of Financial Stability Policy and Research
1801 K St NW
Washington, DC 20551
United States
202-452-3540 (Phone)
202-263-4850 (Fax)

Song Han

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-736-1971 (Phone)
202-452-3891 (Fax)

Dan Li

Federal Reserve Board ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

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