The price impact of institutional herding

Dasgupta, Amil ORCID: 0000-0001-8474-9470, Prat, Andrea and Verardo, Michela (2010) The price impact of institutional herding. Financial Markets Group Discussion Papers (652). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

In this paper we develop a simple theoretical model to analyze the impact of institutional herding on asset prices. A growing empirical literature has come to the intriguing conclusion that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We o§er a theoretical resolution to this dichotomy. In our model, career-concerned money managers interact with profit-motivated proprietary traders and security dealers endowed with market power. We show that the reputational concerns of fund managers imply an endogenous tendency to imitate past trades, which impacts the prices of the assets they trade. In our main result, we show that institutional herding positively predicts short-term returns but negatively predicts long-term returns. Our theory thus provides a simple and unified framework within which to interpret the empirical literature on the price impact of institutional herding. In addition, our paper generates several new testable predictions linking institutional herding behavior, trading volume, and the time-series properties of stock returns.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2010 The Authors
Divisions:	Finance STICERD
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G0 - General > G00 - General G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited:	29 Jun 2023 14:09
Last Modified:	16 Sep 2023 00:02
URI:	http://eprints.lse.ac.uk/id/eprint/119088

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