Events

Finance Seminar

Author:

• Clemens Sialm

  University of Texas at Austin

• Zhi Da
  University of Notre Dame

• Borja Larrainz
  Pontificia Universidad Catolica de Chile

• Jose Tessada
  Pontificia Universidad Catolica de Chile

We document a novel channel through which coordinated noise trading can exert large price impact at the aggregate level in both equity and bond markets even when these markets are dominated by institutional investors. In Chile, where pension assets account for 30% of free oat in the stock market, pension investors often switch their entire pension investments between funds holding mostly risky stocks to funds holding mostly riskfree government bonds in an attempt to time the market." These frequent portfolio reallocations are coordinated across individual investors by an investment advisory firm that has recently gained substantial popularity. In order to implement the resulting fund switches, pension fund companies often faced redemption requests amounting to 10% of their domestic equity and 20% of their bond portfolios within a few days. Not surprisingly, this coordinated noise trading led to large price pressure of almost 2.5% in the equity market and more than 30 basis points even in the relatively liquid government bond market. It also led to excessive volatility.