Institutional Herding and Its Price Impact: Evidence from the Corporate Bond Market

72 Pages Posted: 22 Nov 2015 Last revised: 25 Dec 2017

See all articles by Fang Cai

Fang Cai

Board of Governors of the Federal Reserve System

Song Han

Board of Governors of the Federal Reserve System

Dan Li

Board of Governors of the Federal Reserve System

Yi Li

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: December 20, 2017

Abstract

We examine the extent to which institutional investors herd in the U.S. corporate bond market and the price impact of their herding behavior. We find that the level of institutional herding in corporate bonds is substantially higher than what is documented for equities, and that sell herding is much stronger and more persistent than buy herding. The price impact of herding is also highly asymmetric. While buy herding facilitates price discovery, sell herding causes transitory yet large price distortions. Such price destabilizing effect of sell herding is particularly pronounced for speculative-grade, small, and illiquid bonds, and during the financial crisis.

Keywords: Corporate Bond; Herding; Institutional Investors; Return Reversal

JEL Classification: G01, G02, G12, G14, G20

Suggested Citation

Cai, Fang and Han, Song and Li, Dan and Li, Yi, Institutional Herding and Its Price Impact: Evidence from the Corporate Bond Market (December 20, 2017). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2693717 or http://dx.doi.org/10.2139/ssrn.2693717

Fang Cai (Contact Author)

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Song Han

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Dan Li

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Yi Li

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