Pension Funds' Herding

Dirk W. G. A. Broeders, Damiaan H. J. Chen*, Peter A. Minderhoud, C. J. Willem Schudel

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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Abstract

This paper uses unique and detailed transaction data to analyze herding behavior among pension funds. We distinguish between weak, semi-strong, and strong herding behavior. Weak herding occurs if pension funds have similar rebalancing strategies. Semi-strong herding arises when pension funds react similarly to other external shocks, such as changes in regulation and exceptional monetary policy operations. Finally, strong herding means that pension funds intentionally replicate changes in the strategic asset allocation of other pension funds without an economic reason. We find empirical evidence supporting all three types of herding behavior in the asset allocation of large Dutch pension funds. Whereas weak herding can contribute to financial stability, strong herding may present a risk for financial stability.

Original languageEnglish
Pages (from-to)285-330
Number of pages46
JournalInternational Journal of Central Banking
Volume17
Issue number1
Publication statusPublished - Mar 2021

JEL classifications

  • g23 - "Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors"
  • g11 - "Portfolio Choice; Investment Decisions"

Keywords

  • ASSET ALLOCATION
  • BEHAVIOR
  • INVESTMENT
  • INVESTORS
  • MARKET
  • PERFORMANCE
  • VOLATILITY

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