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Destabilizing Financial Advice: Evidence from Pension Fund Reallocations


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


We document a novel channel through which coordinated trading exerts externalities on financial markets. We study the impact of a financial advisory firm that recommends frequent reallocations between equity and bond funds to Chilean pension investors. The recommendations generate large and coordinated fund flows that are exacerbated by the strategic complementarity arising from fund trading restrictions. The recommendations generate significant price pressure and increased volatility in the stock market. In response to these large trade flows, pension funds shift their allocations to more liquid securities. Our findings suggest that giving retirement savers unconstrained reallocation opportunities can destabilize financial markets. Received March 11, 2016; editorial decision July 8, 2017 by Editor Itay Goldstein.

Suggested Citation

  • Zhi Da & Borja Larrain & Clemens Sialm & José Tessada, 2018. "Destabilizing Financial Advice: Evidence from Pension Fund Reallocations," Review of Financial Studies, Society for Financial Studies, vol. 31(10), pages 3720-3755.
  • Handle: RePEc:oup:rfinst:v:31:y:2018:i:10:p:3720-3755.

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    Cited by:

    1. Mathias Kronlund & Veronika K. Pool & Clemens Sialm & Irina Stefanescu, 2020. "Out of Sight No More? The Effect of Fee Disclosures on 401(k) Investment Allocations," Finance and Economics Discussion Series 2020-078, Board of Governors of the Federal Reserve System (U.S.).
    2. Mathias S. Kruttli & Phillip J. Monin & Sumudu W. Watugala, 2017. "Investor Concentration, Flows, and Cash Holdings : Evidence from Hedge Funds," Finance and Economics Discussion Series 2017-121, Board of Governors of the Federal Reserve System (U.S.).
    3. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    4. Kraemer, Moritz & Klusak, Patrycja & Vu, Huong, 2020. "First-mover disadvantage - The sovereign ratings mousetrap," CEPS Papers 26352, Centre for European Policy Studies.
    5. Kristjanpoller, Werner D. & Olson, Josephine E., 2021. "The effect of market returns and volatility on investment choices in Chile’s defined contribution retirement plan," Journal of International Money and Finance, Elsevier, vol. 112(C).
    6. 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.

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