Destabilizing Financial Advice: Evidence from Pension Fund Reallocations
Forthcoming: Review of Financial Studies
52 Pages Posted: 2 Feb 2015 Last revised: 10 Jan 2018
Date Written: January 10, 2018
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.
Keywords: Coordinated Noise Trading, Pension Funds, Price Pressure, Financial Advisors, Social Media
JEL Classification: G11, G12, G14, G23
Suggested Citation: Suggested Citation