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Coordinated Noise Trading: Evidence from Pension Fund Reallocations

Listed author(s):
  • Zhi Da
  • Borja Larrain
  • Clemens Sialm
  • José Tessada

We document a novel channel through which coordinated noise trading exerts externalities on financial markets dominated by institutional investors. We exploit a unique set of events where Chilean pension fund investors followed an influential financial advisory firm that recommended frequent switches between equity and bond funds. The recommendations, which mostly followed short-term trends, generated large and coordinated fund flows. These flows resulted in substantial price pressure and increased volatility in financial markets. Pension funds increased cash holdings as a response. Our findings suggest that giving retirement savers unconstrained reallocation opportunities may exert negative externalities on financial markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 22161.

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Date of creation: Apr 2016
Handle: RePEc:nbr:nberwo:22161
Note: AG AP CF IFM ITI PE
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