IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/22161.html
   My bibliography  Save this paper

Coordinated Noise Trading: Evidence from Pension Fund Reallocations

Author

Listed:
  • Zhi Da
  • Borja Larrain
  • Clemens Sialm
  • José Tessada

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

  • Zhi Da & Borja Larrain & Clemens Sialm & José Tessada, 2016. "Coordinated Noise Trading: Evidence from Pension Fund Reallocations," NBER Working Papers 22161, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22161
    Note: AG AP CF IFM ITI PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w22161.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Joel Peress, 2014. "The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes," Journal of Finance, American Finance Association, vol. 69(5), pages 2007-2043, October.
    2. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
    3. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 707-747, October.
    4. Leonid Kogan & Stephen A. Ross & Jiang Wang & Mark M. Westerfield, 2006. "The Price Impact and Survival of Irrational Traders," Journal of Finance, American Finance Association, vol. 61(1), pages 195-229, February.
    5. Kogan, Leonid & Ross, Stephen A. & Wang, Jiang & Westerfield, Mark M., 2017. "Market selection," Journal of Economic Theory, Elsevier, vol. 168(C), pages 209-236.
    6. Hans-Martin Von Gaudecker, 2015. "How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?," Journal of Finance, American Finance Association, vol. 70(2), pages 489-507, April.
    7. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2007. "Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(k) Plans," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1992-2013, National Bureau of Economic Research, Inc.
    8. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    9. Dong Lou, 2012. "A Flow-Based Explanation for Return Predictability," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3457-3489.
    10. Brigitte C. Madrian & Dennis F. Shea, 2001. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1149-1187.
    11. Sebastian Edwards, 1998. "The Chilean Pension Reform: A Pioneering Program," NBER Chapters, in: Privatizing Social Security, pages 33-62, National Bureau of Economic Research, Inc.
    12. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Choices, and the Path of Least Resistance," NBER Chapters, in: Tax Policy and the Economy, Volume 16, pages 67-114, National Bureau of Economic Research, Inc.
    13. Greenwood, Robin & Thesmar, David, 2011. "Stock price fragility," Journal of Financial Economics, Elsevier, vol. 102(3), pages 471-490.
    14. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    15. Chalmers, John & Reuter, Jonathan, 2020. "Is conflicted investment advice better than no advice?," Journal of Financial Economics, Elsevier, vol. 138(2), pages 366-387.
    16. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2015. "Money Doctors," Journal of Finance, American Finance Association, vol. 70(1), pages 91-114, February.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, "undated". "Money Doctors," Working Paper 69721, Harvard University OpenScholar.
      • Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert W., 2014. "Money Doctors," Scholarly Articles 12965657, Harvard University Department of Economics.
      • Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, 2012. "Money Doctors," NBER Working Papers 18174, National Bureau of Economic Research, Inc.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2012. "Money Doctors," Working Papers 464, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, "undated". "Money Doctors," Working Paper 228501, Harvard University OpenScholar.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2012. "Money doctors," Economics Working Papers 1355, Department of Economics and Business, Universitat Pompeu Fabra.
    17. Lily Fang & Joel Peress, 2009. "Media Coverage and the Cross‐section of Stock Returns," Journal of Finance, American Finance Association, vol. 64(5), pages 2023-2052, October.
    18. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
    19. Luis Opazo & Claudio Raddatz & Sergio L. Schmukler, 2015. "Institutional Investors and Long-Term Investment: Evidence from Chile," The World Bank Economic Review, World Bank, vol. 29(3), pages 479-522.
    20. Umit G. Gurun & Alexander W. Butler, 2012. "Don't Believe the Hype: Local Media Slant, Local Advertising, and Firm Value," Journal of Finance, American Finance Association, vol. 67(2), pages 561-598, April.
    21. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    22. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R., 2006. "The adequacy of investment choices offered by 401(k) plans," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1299-1314, August.
    23. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
    24. Claudio Raddatz & Sergio Schmukler, 2013. "Deconstructing Herding: Evidence from Pension Fund Investment Behavior," Journal of Financial Services Research, Springer;Western Finance Association, vol. 43(1), pages 99-126, February.
    25. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    26. Zhi Da & Joseph Engelberg & Pengjie Gao, 2011. "In Search of Attention," Journal of Finance, American Finance Association, vol. 66(5), pages 1461-1499, October.
    27. Stephen Foerster & Juhani T. Linnainmaa & Brian T. Melzer & Alessandro Previtero, 2017. "Retail Financial Advice: Does One Size Fit All?," Journal of Finance, American Finance Association, vol. 72(4), pages 1441-1482, August.
    28. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc.
    29. Chen, Qi & Goldstein, Itay & Jiang, Wei, 2010. "Payoff complementarities and financial fragility: Evidence from mutual fund outflows," Journal of Financial Economics, Elsevier, vol. 97(2), pages 239-262, August.
    30. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    31. Daniel Bergstresser & John M. R. Chalmers & Peter Tufano, 2009. "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4129-4156, October.
    32. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    33. Clemens Sialm & Laura T. Starks & Hanjiang Zhang, 2015. "Defined Contribution Pension Plans: Sticky or Discerning Money?," Journal of Finance, American Finance Association, vol. 70(2), pages 805-838, April.
    34. repec:oup:rfinst:v:25:y::i:12:p:3457-3489 is not listed on IDEAS
    35. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    36. Tim Loughran & Bill Mcdonald, 2011. "When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks," Journal of Finance, American Finance Association, vol. 66(1), pages 35-65, February.
    37. Robert F. Stambaugh, 2014. "Presidential Address: Investment Noise and Trends," Journal of Finance, American Finance Association, vol. 69(4), pages 1415-1453, August.
    38. Lauren Cohen & Breno Schmidt, 2009. "Attracting Flows by Attracting Big Clients," Journal of Finance, American Finance Association, vol. 64(5), pages 2125-2151, October.
    39. Olivia Mitchell & Flávio Ataliba F. D. Barreto, 1997. "After Chile, What? Second-Round Social Security Reforms in Latin America," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 12(2), pages 3-36, June.
    40. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R., 2007. "Participant reaction and the performance of funds offered by 401(k) plans," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 249-271, April.
    41. Zhi Da & Joseph Engelberg & Pengjie Gao, 2015. "Editor's Choice The Sum of All FEARS Investor Sentiment and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 1-32.
    42. Richard W. Sias, 2004. "Institutional Herding," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
    43. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
    44. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
    45. Utpal Bhattacharya & Andreas Hackethal & Simon Kaesler & Benjamin Loos & Steffen Meyer, 2012. "Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study," The Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 975-1032.
    46. Susan E. K. Christoffersen & Richard Evans & David K. Musto, 2013. "What Do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives," Journal of Finance, American Finance Association, vol. 68(1), pages 201-235, February.
    47. Gur Huberman & Wei Jiang, 2006. "Offering versus Choice in 401(k) Plans: Equity Exposure and Number of Funds," Journal of Finance, American Finance Association, vol. 61(2), pages 763-801, April.
    48. Lauren Cohen & Andrea Frazzini, 2008. "Economic Links and Predictable Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1977-2011, August.
    49. Robin Greenwood & Andrei Shleifer, 2014. "Expectations of Returns and Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 714-746.
    50. Edelen, Roger M., 1999. "Investor flows and the assessed performance of open-end mutual funds," Journal of Financial Economics, Elsevier, vol. 53(3), pages 439-466, September.
    51. Sendhil Mullainathan & Markus Noeth & Antoinette Schoar, 2012. "The Market for Financial Advice: An Audit Study," NBER Working Papers 17929, National Bureau of Economic Research, Inc.
    52. Shleifer, Andrei, 1986. "Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-590, July.
    53. Jeremy C. Stein, 2005. "Why are Most Funds Open-End? Competition and the Limits of Arbitrage," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 247-272.
    54. Frazzini, Andrea & Lamont, Owen A., 2008. "Dumb money: Mutual fund flows and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 88(2), pages 299-322, May.
    55. Robert F. Stambaugh, 2014. "Investment Noise and Trends," NBER Working Papers 20072, National Bureau of Economic Research, Inc.
    56. Joseph E. Engelberg & Christopher A. Parsons, 2011. "The Causal Impact of Media in Financial Markets," Journal of Finance, American Finance Association, vol. 66(1), pages 67-97, February.
    57. Salvador Valdés & Peter Diamond, "undated". "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
    58. Jeremy C. Stein, 2009. "Presidential Address: Sophisticated Investors and Market Efficiency," Journal of Finance, American Finance Association, vol. 64(4), pages 1517-1548, August.
    59. Olivia S. Mitchell & Flavio Ataliba Barreto, 1997. "After Chile, What? Second-Round Pension Reforms in Latin America," NBER Working Papers 6316, National Bureau of Economic Research, Inc.
    60. Shane A. Corwin & Jay F. Coughenour, 2008. "Limited Attention and the Allocation of Effort in Securities Trading," Journal of Finance, American Finance Association, vol. 63(6), pages 3031-3067, December.
    61. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. I. Koetsier & J.A. Bikker, 2017. "Herding behaviour of Dutch pension funds in sovereign bond investments," Working Papers 17-15, Utrecht School of Economics.
    2. I. Koetsier & J.A. Bikker, 2017. "Herding behaviour of Dutch pension funds in sovereign bond investments," Working Papers 17-15, Utrecht School of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    2. Clemens Sialm & Laura T. Starks & Hanjiang Zhang, 2015. "Defined Contribution Pension Plans: Sticky or Discerning Money?," Journal of Finance, American Finance Association, vol. 70(2), pages 805-838, April.
    3. Magnus Dahlquist & José Vicente Martinez & Paul Söderlind, 2017. "Individual Investor Activity and Performance," The Review of Financial Studies, Society for Financial Studies, vol. 30(3), pages 866-899.
    4. Rizzo, Emanuele, 2018. "Essays on corporate governance and the impact of regulation on financial markets," Other publications TiSEM b5158260-ea13-4763-b992-6, Tilburg University, School of Economics and Management.
    5. Keane, M.P. & Thorp, S., 2016. "Complex Decision Making," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 661-709, Elsevier.
    6. Akbas, Ferhat & Boehmer, Ekkehart & Jiang, Chao & Koch, Paul D., 2022. "Overnight returns, daytime reversals, and future stock returns," Journal of Financial Economics, Elsevier, vol. 145(3), pages 850-875.
    7. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    8. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2015. "Money Doctors," Journal of Finance, American Finance Association, vol. 70(1), pages 91-114, February.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, "undated". "Money Doctors," Working Paper 69721, Harvard University OpenScholar.
      • Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert W., 2014. "Money Doctors," Scholarly Articles 12965657, Harvard University Department of Economics.
      • Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, 2012. "Money Doctors," NBER Working Papers 18174, National Bureau of Economic Research, Inc.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2012. "Money Doctors," Working Papers 464, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, "undated". "Money Doctors," Working Paper 228501, Harvard University OpenScholar.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2012. "Money doctors," Economics Working Papers 1355, Department of Economics and Business, Universitat Pompeu Fabra.
    9. Hackethal, Andreas & Laudenbach, Christine & Meyer, Steffen & Weber, Annika, 2018. "Client involvement in expert advice: Antibiotics in finance?," SAFE Working Paper Series 219, Leibniz Institute for Financial Research SAFE.
    10. Luo, Mancy, 2017. "Essays in financial intermediation and political economy," Other publications TiSEM 146f40d3-6c89-4c6d-8fea-1, Tilburg University, School of Economics and Management.
    11. Hillert, Alexander & Jacobs, Heiko & Müller, Sebastian, 2018. "Journalist disagreement," Journal of Financial Markets, Elsevier, vol. 41(C), pages 57-76.
    12. Peress, Joel & Schmidt, Daniel, 2021. "Noise traders incarnate: Describing a realistic noise trading process," Journal of Financial Markets, Elsevier, vol. 54(C).
    13. Wang, Wenzhao & Duxbury, Darren, 2021. "Institutional investor sentiment and the mean-variance relationship: Global evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 415-441.
    14. Kaniel, Ron & Parham, Robert, 2017. "WSJ Category Kings – The impact of media attention on consumer and mutual fund investment decisions," Journal of Financial Economics, Elsevier, vol. 123(2), pages 337-356.
    15. Chalmers, John & Reuter, Jonathan, 2020. "Is conflicted investment advice better than no advice?," Journal of Financial Economics, Elsevier, vol. 138(2), pages 366-387.
    16. Veronika K. Pool & Clemens Sialm & Irina Stefanescu, 2016. "It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans," Journal of Finance, American Finance Association, vol. 71(4), pages 1779-1812, August.
    17. Fotini Economou & Konstantinos Gavriilidis & Bartosz Gebka & Vasileios Kallinterakis, 2022. "Feedback trading: a review of theory and empirical evidence," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 15(4), pages 429-476, February.
    18. Jūra Liaukonytė & Alminas Žaldokas, 2022. "Background Noise? TV Advertising Affects Real-Time Investor Behavior," Management Science, INFORMS, vol. 68(4), pages 2465-2484, April.
    19. Mohammad (Vahid) Irani & Hugh Hoikwang Kim, 2023. "The consequences of non‐trading institutional investors," Financial Management, Financial Management Association International, vol. 52(3), pages 433-481, September.
    20. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:22161. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.