Institutional herding and its price impact: Evidence from the corporate bond market

We examine the extent to which institutional investors herd in the U.S. corporate bond market and the price impact of their herding behavior. We find that the level of institutional herding in corporate bonds is substantially higher than what is documented for equities, and that sell herding is much...

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Bibliographic Details
Published in:Journal of financial economics 2019-01, Vol.131 (1), p.139-167
Main Authors: Cai, Fang, Han, Song, Li, Dan, Li, Yi
Format: Article
Language:English
Subjects:
Bond markets
Bonds
Corporate bond
Corporate bonds
Discovery
Economic crisis
Economics
Herding
Institutional investments
Institutional investors
Investors
Prices
Return reversal
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Summary:We examine the extent to which institutional investors herd in the U.S. corporate bond market and the price impact of their herding behavior. We find that the level of institutional herding in corporate bonds is substantially higher than what is documented for equities, and that sell herding is much stronger and more persistent than buy herding. The price impact of herding is also highly asymmetric. While buy herding facilitates price discovery, sell herding causes transitory yet large price distortions. Such price destabilizing effect of sell herding is particularly pronounced for speculative-grade, small, and illiquid bonds, and during the financial crisis.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2018.07.012