Asset Price Effects of Peer Benchmarking: Evidence from a Natural Experiment

30 Pages Posted: 5 May 2015

See all articles by Sushant Acharya

Sushant Acharya

Federal Reserve Banks - Federal Reserve Bank of New York

Alvaro Pedraza

World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

Abstract

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

Acharya, Sushant and Morales, Alvaro, Asset Price Effects of Peer Benchmarking: Evidence from a Natural Experiment (May 2015). FRB of New York Staff Report No. 727. Available at SSRN: https://ssrn.com/abstract=2602278 or http://dx.doi.org/10.2139/ssrn.2602278

Sushant Acharya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Alvaro Morales

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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