Discussion: “Institutional Herding” by Gutierrez and Kelley G. Garvey BGI

Strengths Clearly and honestly done. –For example, just takes cluster-buys or sells as they come Packs quite a bit of info in 26 pages. –Refereeing process likely to add kilos of fat, so read this version Potentially interesting finding. Looks at all institutions, not just mutual funds

What’s the paper’s real question and contribution? The phenomenon of herding? Institutional investor performance? Role of institutional investors in price formation? An exploitable anomaly?

Does it contribute to our understanding of herding? Does not report descriptive stats on distribution of herd-size Note: this could strongly time-vary and methodology here suppress this (uses ranks or regression stats by month or quarter) Source of clustering/herding still quite mysterious. –Brown et al explain only a trivial portion with analyst recs

Does it tell us much about institutional investor skill? Smart guys (good past performers) appear to play the game well Must be a small component of overall performance But is it a viable indicator of real skill? –Turn your experiment around: do good herd-riders do well in their overall investments in the future? –Essentially, a specific arena in which skills can be displayed. Is the skill generalisable?

Does it say much about price de-stabilization? Extreme decile of buys produces reversible return of about 2.5%. –This is less than 10% of the vol of a representative stock –Since we are looking at the top 10% of buys, this is less than 1% of market vol –Arguably should be further shrunk towards zero because we used the sample to exclude sells as a destabilizer

Is this an exploitable anomaly? Some ssrn trawlers are surely trading this (although the authors make no claim about efficiency). Problems: –Need to be sure how this aggregates to the stock level, especially since your investment horizon is longer than a quarter –Lots of degrees of freedom used to get the result Buys, not sells. Will this hold out of sample? Time horizon of return effect is also left wide-open

Where to go from here? Link more closely to trading and market impact Challenge is that the data here are quarterly. But at the end of the day this is a trading phenomenon and needs to be taken seriously as such. –More proprietary datasets? –Natural experiments (quant meltdown)? –Drill down to monthly mutual fund, and then to smaller subsets of investors whose trades can be observed more frequently?