1. Destabilizing Noise Trading: Evidence from Pension Fund Reallocations Z. Da, B. Larrain, C. Sialm, J. Tessada Destabilizing Noise Trading: Evidence from Pension Fund Reallocations Z. Da, B. Larrain, C. Sialm, J. Tessada Discussed by Yong Chen Texas A&M University WU Gutmann Symposium, Vienna August 19, 2015

2. Liquidity Timing  The debate about the effect of noise trading dates back to Keynes (1936) and Freedman (1953).  De Long, Shleifer, Summers, and Waldmann (1990): Noise traders cause asset prices to deviate from fundamentals, if risk-averse arbitrageurs have short trading horizons.  Empirically, noise trading has been shown to affect asset prices (e.g., Baker and Wurgler, 2006; Barber, Odean, and Zhu, 2009; Da, Engelberg, and Gao, 2014). Further, systematic exposure to noise trader risk is priced in security returns (Chen, Han, and Pan, 2015). Summary (1) Yong Chen Slide 2

3. Liquidity Timing  This paper uses the setting of Chilean pension system to study “coordinated noise trading.”  Chilean pension system has several unique features:  Pension investors have freedom to and often do switch between stocks and government bonds.  Since 2011, such switches were influenced by recommendations of an advisory firm called “FyF”.  To accommodate massive switches, pension fund companies trade a sizable portion of their portfolios within a few days. Summary (2) Yong Chen Slide 3

4. Liquidity Timing  The main findings are:  Large price pressure in both stock and bond markets follows FyF recommendations.  Abnormal turnover occurs for large stocks and long- term bonds, main holdings of pension funds, right after FyF recommendations.  Excessive volatility is associated with heavy price pressure proxied by flow-induced pressure (FIP).  Pension funds react with more cash holdings. Summary (3) Yong Chen Slide 4

5. Liquidity Timing  Very important topic.  Unique setting of Chilean pension system.  Carefully-executed analysis.  Many interesting results. Summary (4) Yong Chen Slide 5

6. Liquidity Timing Un-coordinated Noise trading What’s Un-coordinated Noise trading like? Yong Chen Slide 6

7. Liquidity Timing Coordinated (Noise) trading What’s Coordinated (Noise) trading like? Yong Chen Slide 7

8. Liquidity Timing Coordinated (Noise) trading What’s Coordinated (Noise) trading like? Yong Chen Slide 8

9. Liquidity Timing  The paper (Fig. 3) looks at cumulative raw returns of following FyF recommendations, which is not very impressive especially after 2012.  But, by switching between stocks and bonds, the strategy may have lower market risk than buy-and-hold.  Suggestion: Report risk-adjusted return (i.e., alpha) for the strategy of following FyF; Test the strategy’s market-timing performance, via Treynor-Mazuy or Henriksson-Merton market-timing model. Information vs. Noise? Yong Chen Slide 9

10. Liquidity Timing  Can the story be that some information arrived right before FyF recommendations and its effect lasted until after the recommendations?  Suggestion: Include dummies of days prior to FyF recommendations, say, Day –1, Day –2, Day –3, into the regressions. Information vs. Noise? Yong Chen Slide 10

11. Liquidity Timing  Why do pension investors follow FyF? –The paper mentions marketing efforts on social media. –Suggestion: Provide some details about how FyF became popular.  What can FyF do about the noise trading? –“Front running”? If Noise, then … Yong Chen Slide 11

12. Liquidity Timing  What do sophisticated investors (Institutional Investors) do about FyF recommendations? ─ Suggestion: Use change in holdings of Institutional Ownership (IO) as a comparison group.  What should pension investors do? ─ Think about the welfare implication of coordinated noise trading. If Noise, then … Yong Chen Slide 12

13. Thank You! Yong Chen Slide 13