Asset Price Effects of Peer Benchmarking : Evidence from a Natural Experiment
This paper estimates the effects of peer benchmarking by institutional investors on asset prices. To identify trades purely due to peer benchmarking as separate from those based on fundamentals or private information, the paper exploits a natural e...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2015/04/24359081/asset-price-effects-peer-benchmarking-evidence-natural-experiment http://hdl.handle.net/10986/21853 |
| Summary: | This paper estimates the effects of peer
benchmarking by institutional investors on asset prices. To
identify trades purely due to peer benchmarking as separate
from those based on fundamentals or private information, the
paper exploits a natural experiment involving a change in a
government imposed underperformance penalty applicable to
Colombian pension funds. This change in regulation is
orthogonal to stock fundamentals and only affects incentives
to track peer portfolios allowing the authors to identify
the component of demand due to peer benchmarking. The
authors find that peer effects among pension fund managers
generate excess in stock return volatility, with stocks
exhibiting short-term abnormal returns followed by returns
reversal in the subsequent quarter. Additionally, peer
benchmarking produces an excess in comovement across stock
returns beyond the correlation implied by fundamentals. |
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