Herd behavior of pension funds in sovereign bond investments

Abstract

This study investigates herd behavior exhibited by pension funds in the sovereign bond market before, during and after the European debt crisis. It uses unique monthly data on sovereign bond holdings of pension funds and transactions between December 2008 and December 2014. The dataset covers 67 large Dutch pension funds that invest in bonds from 109 countries. We find evidence of intensive herd behavior of Dutch pension funds in sovereign bonds. We also distinguish between European countries which suffer from the European debt crisis, such as Cyprus, Greece, Ireland, Italy, Portugal and Spain, and those that have not. We find high sell herding and low buy herding for the crisis countries during the European debt crisis, whereas in the non-crisis period their herd behavior does not differ substantially from that in non-crisis countries. When we control for institutional, macroeconomic, financial market and pension fund factors, sell herding in crisis countries is still significantly higher. However, we find no evidence of destabilizing behavior with respect to bonds of crisis countries during the European debt crisis.

Herd Behaviour of Pension Funds by Asset Class

“…Broeders et al (2021) find empirical evidence of herding behaviour in the equity and bond allocation for 39 large Dutch pension funds. Koetsier and Bikker (2022) also find substantial herd behaviour in sovereign bond investments. They conclude that the extent of herding is influenced by macroeconomic, financial, and institutional circumstances.…”

“…This means that the asset class must at least equal 0.5%, 1%, 2.5% or 5% of total holdings. Koetsier and Bikker (2022) show that the results do not change much when the limitations are addressed in several ways.…”

“…The financial literature identifies some limitations of the LSV herding measure. For a more detailed overview of the limitations, we refer to Koetsier and Bikker (2022). We address the no-short selling constraint by setting a minimum to the holdings of an asset class.…”