Working Paper: NBER ID: w3846
Authors: Josef Lakonishok; Andrei Shleifer; Robert W. Vishny
Abstract: This paper uses a new data set of quarterly portfolio holdings of 769 all-equity pension funds between 1985 and 1989 to evaluate the potential effect of their trading on stock prices. We address two aspects of trading by money managers: herding, which refers to buying (selling) the same stocks as other managers buy (sell) at the same time; and positive-feedback trading, which refers to buying winners and selling losers. These two aspects of trading are commonly a part of the argument that institutions destabilize stock prices. At the level of individual stocks at quarterly frequencies, we find no evidence of substantial herding or positive-feedback trading by pension fund managers, except in small stocks. Also, there is no strong cross-sectional correlation between changes in pension funds' holdings of a stock and its abnormal return.
Keywords: institutional investors; herding; feedback trading; stock prices; pension funds
JEL Codes: G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional investors do not substantially herd or engage in positive-feedback trading (G23) | Stock price stability (G19) |
| Institutional trading does not drive price movements (D47) | Changes in pension funds' holdings of a stock (G23) |
| Herding in smaller stocks (C92) | Price instability (E31) |
| Positive feedback trading in smaller stocks (G41) | Price instability (E31) |
| Weak correlation between institutional excess demand and price change (E39) | Price movements (G13) |