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Equity fire sales and herding behavior in pension funds

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  • Bastías, Jaime
  • Ruiz, José L.

Abstract

This study analyzes the effects of a regulatory shock that generates pressure to sell the excess equity investment maintained by Chilean Pension Fund Administrators (AFPs). This quasi-natural experiment allows us to gauge the impact of fire sales in an emerging economy with a strong presence of institutional investors allocating portfolios in the context of herding behavior. The sample consists of panel data for pension funds and equities in their portfolios. We find that herding is relevant when explaining the pressure to sell stocks after the regulatory shock. In addition, AFP sales decision-making considers stock characteristics such as stock ownership, market capitalization terciles of the traded companies, breadth of ownership, and stock illiquidity. These results are relevant for policymakers and capital market participants alike when analyzing portfolio decision-making in pension funds.

Suggested Citation

  • Bastías, Jaime & Ruiz, José L., 2022. "Equity fire sales and herding behavior in pension funds," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922000964
    DOI: 10.1016/j.ribaf.2022.101708
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    More about this item

    Keywords

    Herding behavior; Fire sales; Institutional investors; Pension funds; Regulatory shocks;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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