Destabilizing Financial Advice: Evidence from Pension Fund Reallocations

Forthcoming: Review of Financial Studies

52 Pages Posted: 2 Feb 2015 Last revised: 10 Jan 2018

See all articles by Zhi Da

Zhi Da

University of Notre Dame - Mendoza College of Business

Borja Larrain

Pontificia Universidad Catolica de Chile

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

José Tessada

Business School, Pontificia Universidad Católica

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2018

Abstract

We document a novel channel through which coordinated trading exerts externalities on financial markets. We study the impact of a financial advisory firm that recommends frequent reallocations between equity and bond funds to Chilean pension investors. The recommendations generate large and coordinated fund flows that are exacerbated by the strategic complementarity arising from fund trading restrictions. The recommendations generate significant price pressure and increased volatility in the stock market. In response to these large trade flows, pension funds shift their allocations to more liquid securities. Our findings suggest that giving retirement savers unconstrained reallocation opportunities can destabilize financial markets.

Keywords: Coordinated Noise Trading, Pension Funds, Price Pressure, Financial Advisors, Social Media

JEL Classification: G11, G12, G14, G23

Suggested Citation

Da, Zhi and Larrain, Borja and Sialm, Clemens and Tessada, Jose, Destabilizing Financial Advice: Evidence from Pension Fund Reallocations (January 10, 2018). Forthcoming: Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2558773 or http://dx.doi.org/10.2139/ssrn.2558773

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Borja Larrain

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Jose Tessada

Business School, Pontificia Universidad Católica ( email )

Vicuna Mackenna 4860
Santiago
Chile

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