Destabilizing Financial Advice: Evidence from Pension Fund Reallocations

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: 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