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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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Web page: http://www.lse.ac.uk/fmg/

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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 dp666, Financial Markets Group.
  2. Michael G Papaioannou & Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges," IMF Working Papers 13/193, International Monetary Fund.
  3. Dalia El-Shiaty & Ahmed Abdelmotelib Badawi, 2014. "Herding Behavior in the Stock Market: An Empirical Analysis of the Egyptian Exchange," Working Papers 37, The German University in Cairo, Faculty of Management Technology.
  4. Lubos Pastor & Robert F. Stambaugh, 2010. "On the Size of the Active Management Industry," NBER Working Papers 15646, National Bureau of Economic Research, Inc.
  5. Gabriel Desgranges & Céline Rochon, 2013. "Conformism and public news," Economic Theory, Springer, vol. 52(3), pages 1061-1090, April.
  6. Veronica Guerrieri & Peter Kondor, 2012. "Fund Managers, Career Concerns, and Asset Price Volatility," American Economic Review, American Economic Association, vol. 102(5), pages 1986-2017, August.
  7. 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.
  8. Rudiger, Jesper & Vigier, Adrien, 2013. "Financial Experts, Asset Prices and Reputation," MPRA Paper 51784, University Library of Munich, Germany.
  9. 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.

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