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The Price Impact of Institutional Herding

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  • Amil Dasgupta

    ()

  • Andrea Prat

    ()

  • Michela Verardo

    ()

Abstract

In this paper we develop a simple theoretical model to analyze the impact of institu- tional herding on asset prices. A growing empirical literature has come to the intriguing conclusion that institutional herding positively predicts short-term returns but nega- tively predicts long-term returns. We o¤er a theoretical resolution to this dichotomy. In our model, career-concerned money managers interact with pro?t-motivated proprietary traders and security dealers endowed with market power. We show that the reputational concerns of fund managers imply an endogenous tendency to imitate past trades, which impacts the prices of the assets they trade. In our main result, we show that institutional herding positively predicts short-term returns but negatively predicts long-term returns. Our theory thus provides a simple and uni?ed framework within which to interpret the empirical literature on the price impact of institutional herding. In addition, our paper generates several new testable predictions linking institutional herding behavior, trading volume, and the time-series properties of stock returns.

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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp652.

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Date of creation: Apr 2010
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Handle: RePEc:fmg:fmgdps:dp652

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Citations

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Cited by:
  1. Dimitri Vayanos & Paul Woolley, 2011. "An institutional Theory of Momentum and Reversal," FMG Discussion Papers, Financial Markets Group dp666, Financial Markets Group.
  2. Veronica Guerrieri & Peter Kondor, 2010. "Fund managers, career concerns, and asset price volatility," Staff Report, Federal Reserve Bank of Minneapolis 446, Federal Reserve Bank of Minneapolis.
  3. Lubos Pastor & Robert F. Stambaugh, 2010. "On the Size of the Active Management Industry," NBER Working Papers 15646, National Bureau of Economic Research, Inc.
  4. Céline Rochon & Gabriel Desgranges, 2011. "Conformism and Public News," IMF Working Papers 11/33, International Monetary Fund.
  5. Moatemri Ouarda & Abdelfatteh El Bouri & Olivero Bernard, 2013. "Herding Behavior under Markets Condition: Empirical Evidence on the European Financial Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 214-228.
  6. Christopher Boortz & Simon Jurkatis & Stephanie Kremer & Dieter Nautz, 2013. "Institutional Herding in Financial Markets: New Evidence through the Lens of a Simulated Model," Discussion Papers of DIW Berlin 1336, DIW Berlin, German Institute for Economic Research.
  7. Michael G Papaioannou & Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis," IMF Working Papers 13/193, International Monetary Fund.
  8. Dalia El-Shiaty & Ahmed Abdelmotelib Badawi, 2014. "Herding Behavior in the Stock Market: An Empirical Analysis of the Egyptian Exchange," Working Papers, The German University in Cairo, Faculty of Management Technology 37, The German University in Cairo, Faculty of Management Technology.
  9. Christopher Boortz & Stephanie Kremer & Simon Jurkatis & Dieter Nautz, 2014. "Information Risk, Market Stress and Institutional Herding in Financial Markets: New Evidence Through the Lens of a Simulated Model," SFB 649 Discussion Papers SFB649DP2014-029, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  10. Andrea M. Buffa & Dimitri Vayanos & Paul Woolley, 2014. "Asset Management Contracts and Equilibrium Prices," NBER Working Papers 20480, National Bureau of Economic Research, Inc.
  11. Gupta-Mukherjee, Swasti, 2013. "When active fund managers deviate from their peers: Implications for fund performance," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1286-1305.
  12. Rudiger, Jesper & Vigier, Adrien, 2013. "Financial Experts, Asset Prices and Reputation," MPRA Paper 51784, University Library of Munich, Germany.

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