Political uncertainty and institutional herding
Wednesday 03 November 2021
02:00 PM - 03:30 PM
Dr. Vasileios (Bill) Kallinterakis is Senior Lecturer in Corporate Finance at the University of Liverpool Management School. Previously, he lectured at Durham University Business School; he has held part-time posts at several other universities (University of Birmingham; University of Glasgow; Leeds University; University of Reading) and delivered a series of lectures as Visiting Researcher at the Bulgarian National Bank. His research interests focus on behavioral finance, institutional investors, market volatility, emerging/frontier markets and high frequency trading. To date, he has published a large number of academic articles in high-quality peer-reviewed journals (e.g., Journal of Financial Economics, Journal of Corporate Finance, Risk Analysis Journal, Journal of Banking and Finance, Journal of Economic Behavior and Organization), has contributed to the Wylie Encyclopedia of Management and has co-edited two Elsevier books.
Political uncertainty is a key determinant of investment decisions. Specifically, the uncertainty that surrounds government policy makes beliefs noisier and depresses stock prices. In this paper, we explore whether institutional investors "herd", i.e., mimic each other's trades, in response to political uncertainty. Using U.S. institutional investors' quarterly holding data from 1985 through 2019, we find evidence consistent with our conjecture. We also find that the results are stronger in times of low presidential popularity, and among companies that are politically sensitive. Overall, the findings suggest that the effect of political uncertainty on financial markets is larger than previously thought.