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The price impact of institutional herding

Dasgupta, Amil and Prat, Andrea and Verardo, Michela (2011) The price impact of institutional herding. Review of Financial Studies, 24 (3). pp. 892-925. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hhq137

Abstract

We develop a simple model of the price impact of institutional herding. The empirical literature indicates that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We offer a theoretical resolution to this dichotomy. In our model, career-concerned money managers trade with security dealers endowed with market power and exhibit an endogenous tendency to imitate past trades. This tendency is exploited by dealers and thus affects prices. In equilibrium, institutional herding positively predicts short-term returns but negatively predicts long-term returns. Our article also generates several new, testable predictions that link institutional herding with the time-series properties of returns and volume.

Item Type: Article
Official URL: http://rfs.oxfordjournals.org/
Additional Information: © 2011 The Authors
Subjects: H Social Sciences > HG Finance
Sets: Departments > Economics
Departments > Finance
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 08 Apr 2011 14:00
Last Modified: 08 Apr 2011 14:00
URI: http://eprints.lse.ac.uk/id/eprint/33935

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