Coordinated Noise Trading: Evidence from Pension Fund Reallocations

50 Pages Posted: 11 Apr 2016

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: April 2016

Abstract

We document a novel channel through which coordinated noise trading exerts externalities on financial markets dominated by institutional investors. We exploit a unique set of events where Chilean pension fund investors followed an influential financial advisory firm that recommended frequent switches between equity and bond funds. The recommendations, which mostly followed short-term trends, generated large and coordinated fund flows. These flows resulted in substantial price pressure and increased volatility in financial markets. Pension funds increased cash holdings as a response. Our findings suggest that giving retirement savers unconstrained reallocation opportunities may exert negative externalities on financial markets.

Suggested Citation

Da, Zhi and Larrain, Borja and Sialm, Clemens and Tessada, Jose, Coordinated Noise Trading: Evidence from Pension Fund Reallocations (April 2016). NBER Working Paper No. w22161. Available at SSRN: https://ssrn.com/abstract=2762068

Zhi Da (Contact Author)

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

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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