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Do Institutional Investors Destabilize Stock Prices? Evidence on Herding and Feedback Trading

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  • Josef Lakonishok
  • Andrei Shleifer
  • Robert W. Vishny

Abstract

This paper uses a new data set of quarterly portfolio holdings of 769 all-equity pension funds between 1985 and 1989 to evaluate the potential effect of their trading on stock prices. We address two aspects of trading by money managers: herding, which refers to buying (selling) the same stocks as other managers buy (sell) at the same time; and positive-feedback trading, which refers to buying winners and selling losers. These two aspects of trading are commonly a part of the argument that institutions destabilize stock prices. At the level of individual stocks at quarterly frequencies, we find no evidence of substantial herding or positive-feedback trading by pension fund managers, except in small stocks. Also, there is no strong cross-sectional correlation between changes in pension funds' holdings of a stock and its abnormal return.

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File URL: http://www.nber.org/papers/w3846.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3846.

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Date of creation: Sep 1991
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Publication status: published as "The Impact of Institutional Investors on Stock Prices", Journal of Financial Economics, August 1992, vol 32, no. 1, pp 23-43
Handle: RePEc:nbr:nberwo:3846

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  1. Shiller, 021Robert J. & Pound, John, 1989. "Survey evidence on diffusion of interest and information among investors," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 47-66, August.
  2. Kraus, Alan & Stoll, Hans R., 1972. "Parallel Trading by Institutional Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(05), pages 2107-2138, December.
  3. 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 379-95, June.
  4. Josef Lakonishok & Andrei Shleifer & Richard Thaler & Robert Vishny, 1991. "Window Dressing by Pension Fund Managers," NBER Working Papers 3617, National Bureau of Economic Research, Inc.
  5. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
  6. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
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Cited by:
  1. Massimo Massa & William N. Goetzmann, 1999. "Index Funds and Stock Market Growth," Yale School of Management Working Papers ysm23, Yale School of Management.
  2. William N. Goetzmann & Massimo Massa, 2000. "Daily Momentum and Contrarian Behavior of Index Fund Investors," NBER Working Papers 7567, National Bureau of Economic Research, Inc.
  3. Verma, Rahul & Soydemir, Gökçe, 2009. "The impact of individual and institutional investor sentiment on the market price of risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1129-1145, August.
  4. Massimo Massa & William Goetzmann, 2001. "Dispersion of Opinion and Stock Returns: Evidence from Index Fund Investors," Yale School of Management Working Papers ysm227, Yale School of Management, revised 01 May 2003.
  5. Henryk Gurgul & Pawel Majdosz, 2006. "The impact of institutional investors on risk and stock return autocorrelation in the context of the polish pension reform," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 2, pages 5-30.
  6. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers 4829, C.E.P.R. Discussion Papers.
  7. Massimo Massa & William Goetzmann, 2001. "Heterogeneity of Trade and Stock Returns. Evidence from Index Fund Investors," Yale School of Management Working Papers ysm176, Yale School of Management, revised 01 Nov 2001.

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