Herding in Chile: the case of equity trading in the Chilean pension fund market

Abstract

The phenomena of ‘herding’ or herd behavior can have important effects when it manifests in equity markets as co-movement in trades of institutional money managers. On one hand, the assetsunder management are so large in comparison with the size of themarket that the trades of these managers affect asset prices, evenmore so if many managers trade in the same direction. On the otherhand, commissions and fees paid by investors are supposedly leviedin exchange for an expert management of the investors’ capital.Thus, a manager that simply imitates the behavior of others does notadd value with her work. The present study is the first to report theresults of two measures of herding used to study this phenomenon in the equity portions of Chilean AFP (pension) funds. One measure isthe widely used Lakonishok, Vishny y Shleifer (1992) metric, theother is a relatively newer measure presented in Sias (2004). Using adataset of monthly fund trades during the period 2003-2011, bothmeasures find herding in the Chilean market which, while moderatein intensity, is still higher than that reported in the stock markets ofdeveloped countries. More interesting is the asymmetry of results:herding is stronger during times of market crisis, and almostdisappears during periods when the economy expands. These resultshave important implications for performance evaluation and valueadded of the pension funds managed by the AFPs, as well as theimpact of their trades in the stability of the stock market