Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120849
Authors: 
Acharya, Sushant
Pedraza, Alvaro
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 727
Abstract: 
We estimate the effects of peer benchmarking by institutional investors on asset prices. To identify trades purely due to peer benchmarking as separate from those based on fundamentals or private information, we exploit a natural experiment involving a change in a government-imposed underperformance penalty applicable to Colombian pension funds. This change in regulation is orthogonal to stock fundamentals and only affects incentives to track peer portfolios, allowing us to identify the component of demand that is caused by peer benchmarking. We find that these peer effects generate excess stock return volatility, with stocks exhibiting short-term abnormal returns followed by returns reversal in the subsequent quarter. Additionally, peer benchmarking produces an excess in comovement across stock returns beyond the correlation implied by fundamentals.
Subjects: 
herding
institutional investors
asset prices
comovement
JEL: 
G12
G14
G23
Document Type: 
Working Paper

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