Regulatory Induced Herding? Evidence from Polish Pension Funds

EBRD Working Paper No. 96

Posted: 18 Dec 2006

See all articles by Zbigniew W. Kominek

Zbigniew W. Kominek

European Bank for Reconstruction and Development (EBRD)

Date Written: June 2006

Abstract

The paper documents herding among pension fund managers in Poland. Herding occurs despite the lack of an economically significant link between fund performance and the flow of new capital or members. To explain this phenomenon, the paper outlines a model that attributes herding to performance incentive contracts imposed by the authorities in Poland. The model shows that penalties for underperformance imposed by the regulator are likely to cause fund managers to follow each other's portfolio choices and pursue similar investment strategies. Since herding causes similar portfolio allocations by all funds, the results call for a reduction in the number of funds, or a review of the relative performance incentive system and current constraints on portfolio allocation. The latter could also help reduce the dominance of government bonds in investment portfolios of pension funds.

Keywords: pension funds, herding, portfolio choice

JEL Classification: G11, G23

Suggested Citation

Kominek, Zbigniew W., Regulatory Induced Herding? Evidence from Polish Pension Funds (June 2006). EBRD Working Paper No. 96. Available at SSRN: https://ssrn.com/abstract=948568

Zbigniew W. Kominek (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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