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Zhi Da, Associated Professor of Finance, University of Notre Dame: Price Pressure from Coordinated Noise Trading: Evidence from Pension Fund Reallocations

Time:2015-05-21 Print

Topic: Price Pressure from Coordinated Noise Trading: Evidence from Pension Fund Reallocations

Speaker: Zhi Da, Associated Professor of Finance, Mendoza College of Business, University of Notre Dame

Date: May 21st (Thu.)

Time: 2:00pm-3:30pm

Location: Building 4, Room 101

Language: English

Abstract:

We document a novel channel through which coordinated noise trading can exert large price impact at the aggregate level in both equity and bond markets. In Chile, pension investors often switch their entire pension investments between funds holding mostly risky stocks to funds holding mostly risk-free government bonds in an attempt to \time the market." These frequent portfolio reallocations are coordinated across individual investors by an investment advisory firm that has recently gained substantial popularity on social media. In order to implement the resulting fund switches, pension fund companies often face redemption requests amounting to 10% of their domestic equity and 20% of their bond portfolios within a few days. Not surprisingly, this coordinated noise trading leads to large price pressure of almost 2.5% in the equity market and more than 30 basis points even in the relatively liquid government bond market.

About the speaker:

Zhi Da is Viola D. Hank Associated Professor of Finance at Mendoza College of Business, University of Notre Dame. Professor Da received a BBA and MSc in Financial Engineering from National University of Singapore and Ph.D. in Finance from Northwestern University. His research interests focuses on what drives asset return in both short-term (liquidity shock, investor sentiment, limited attention, etc.) and long-term (cashflow and discount rate news). His papers have been published in Review of Financial Studies, Journal of Financial Economics, Journal of Financial and Quantitative Analysis and Management Science and other leading finance journals. 

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