Asset Price Effects of Peer Benchmarking: Evidence from a Natural Experiment
30 Pages Posted: 5 May 2015
Date Written: May 2015
We estimate 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, we exploit a natural experiment involving a change in a government-imposed under-performance penalty applicable to Colombian pension funds. This change in regulation is orthogonal to stock fundamentals and only affects incentives to track peer portfolios, allowing us to identify the component of demand that is caused by peer benchmarking. We find that these peer effects generate excess 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 co-movement across stock returns beyond the correlation implied by fundamentals.
Keywords: herding, institutional investors, asset prices, co-movement
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation