Discussion Paper

Natural Experiment Sheds Light on the Market Effects of Herding

Abstract: Pension funds are expected to behave in a patient, countercyclical manner, making the most of low valuations over the business cycle to achieve high returns. Such behavior provides liquidity and stability to the financial system. However, this belief has come under question. A large theoretical literature has emerged which looks at how short-term considerations affecting these institutional investors might arise from relative performance concerns or from the influence of other incentives introduced by market and regulatory monitoring. Such considerations might incentivize fund managers to mimic others and herd toward common assets. Given the sizable wealth under management by these investors, such herding behavior can potentially have large effects on asset prices both in the short and long run.

Keywords: Herding; Asset Price Effects;

JEL Classification: G1; G2;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2015-09-30

Number: 20150930