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Institutional herding in the corporate bond market

Author

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  • Fang Cai
  • Song Han
  • Dan Li

Abstract

We find substantial herding in U.S. corporate bonds among bond fund managers, much higher than that previously documented for the equity market. Herding is generally stronger among illiquid bonds, and buy herding and sell herding are driven by different factors. In particular, sell herding increases on negative news about bond ratings and corporate earnings. Interestingly, increases in ex-post transparency in corporate bond trading through Trade Reporting and Compliance Engine (TRACE) led to higher buy herding but not to higher sell herding. Finally, we find significant return reversals in the post-herding quarters, especially for sell herding and for junk bonds. Price reversal is most prominent when funds herd to sell illiquid bonds, which suggests that temporary price pressure is the reason behind price reversal.

Suggested Citation

  • Fang Cai & Song Han & Dan Li, 2012. "Institutional herding in the corporate bond market," International Finance Discussion Papers 1071, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1071
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    References listed on IDEAS

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    1. repec:eee:ecofin:v:42:y:2017:i:c:p:107-131 is not listed on IDEAS
    2. repec:eee:ecoser:v:9:y:2014:i:c:p:83-97 is not listed on IDEAS
    3. Huang, Lu & Liu, Yizao, 2014. "The Dynamics of Brand Value in the Carbonated Soft Drinks Industry," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 172389, Agricultural and Applied Economics Association.
    4. Ian Koetsier & Jacob Bikker, 2017. "Herding behaviour of Dutch pension funds in sovereign bond investments," DNB Working Papers 569, Netherlands Central Bank, Research Department.

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