Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice and Investor Experience

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This paper studies a newly-available data set of daily net transfers in several asset classes for roughly 1.5 million 401(k) participants, during the August 1997-September 2002 period. Summary statistics and time-series models point to several new and interesting stylized facts. First, the correlations between transfers in different equity classes and in different bond classes are positive, whereas the correlations between transfers in equities and bonds are negative. This suggests that investors go from an equity (bond) investment to a bond (equity) investment, but they do not rebalance from one equity (bond) class to another equity (bond) class. Second, transfers correlate significantly with contemporaneous returns on various benchmarks. Third, the initial response of prices to transfers tends to be reversed, whereas there is continuation in the response of allocations to returns; i.e. there is evidence of price reversals and of lagged feedback trading. Fourth, tests based on the identification-through-heteroskedasticity approach indicate that there is instantaneous feedback between returns and transfers. Fifth, structural-form estimates show how the responses of transfers and returns to some economic news are amplified by the instantaneous feedback between the two series.