Finance Seminar（2015-14）

Topic: Price Pressure from Coordinated Noise Trading: Evidence from Pension Fund Reallocations

Speaker: Zhi Da,University of Notre Dame

Time: Wednesday, 20May, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract: 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. In Chile, pension investors often switch their entire pension investments between funds holding mostly risky stocks to funds holding mostly risk-free 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 on social media. In order to implement the resulting fund switches, pension fund companies often face 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 leads 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.