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NATIONAL BUREAU OF ECONOMIC RESEARCH
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Coordinated Noise Trading: Evidence from Pension Fund Reallocations

Zhi Da, Borja Larrain, Clemens Sialm, José Tessada

NBER Working Paper No. 22161
Issued in April 2016
NBER Program(s):The Program on Aging, The Asset Pricing Program, The Corporate Finance Program, The International Finance and Macroeconomics Program, The International Trade and Investment Program, The Public Economics Program

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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Document Object Identifier (DOI): 10.3386/w22161

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