Pension Funds Interconnections and Herd Behavior

67 Pages Posted: 6 Nov 2018

See all articles by Rob Bauer

Rob Bauer

Maastricht University

Matteo Bonetti

Maastricht University

Dirk Broeders

De Nederlandsche Bank; Maastricht University

Date Written: October 30, 2018

Abstract

We use a unique dataset on the governance structures of 191 Dutch pension funds to study the effect of interconnections on strategic investment decisions in alternative assets. The interconnections are determined through trustees, actuaries, or dominant asset managers who provide services to multiple pension funds. We use spatial econometrics and find that pension funds that are interconnected via actuaries or dominant asset managers change their strategic allocations in the same direction over time, which is in line with herding. The effect of interconnections can be sizable. A pension fund interconnected to two other pension funds through the same dominant asset manager will increase on average its allocation to alternative investments by 2.5 percent if both pension funds increase their allocation by 10 percent, all else being equal. Conversely, pension funds interconnected via trustees display independent strategic asset allocations. Interconnections facilitate the transfer of information. However, herding can lead pension funds to develop an alternative asset class portfolio that is not in line with their liability structure, size, or knowledge level.

Keywords: Herd Behavior, Pension Funds, Asset Allocation, Alternative Asset Classes, Spatial Econometrics, Interconnection

JEL Classification: G11, G23

Suggested Citation

Bauer, Rob and Bonetti, Matteo and Broeders, Dirk, Pension Funds Interconnections and Herd Behavior (October 30, 2018). De Nederlandsche Bank Working Paper No. 612. Available at SSRN: https://ssrn.com/abstract=3279390 or http://dx.doi.org/10.2139/ssrn.3279390

Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Matteo Bonetti (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Dirk Broeders

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

HOME PAGE: http://www.dnb.nl/en/onderzoek-2/onderzoekers/overzicht-persoonlijke-paginas/dnb257487.jsp

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

HOME PAGE: http://https://www.maastrichtuniversity.nl/about-um/faculties/school-business-and-economics

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