Chabakauri, Georgy ORCID: 0009-0002-7980-269X and Rytchkov, Oleg (2021) Asset pricing with index investing. Journal of Financial Economics, 141 (1). 195 - 216. ISSN 0304-405X
Text (Asset pricing with index investing)
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Abstract
We theoretically analyze how index investing affects financial markets using a dynamic exchange economy with heterogeneous investors and two Lucas trees. We identify two ef- fects of indexing: lockstep trading of stocks increases market volatility and stock return correlations but reduction in risk sharing decreases them. Overall, indexing decreases market volatility but has an ambiguous effect on the correlations. Also, index invest- ing decreases an investor’s welfare, but indexing by other investors partially offsets the loss. When the introduction of index trading opens financial markets for new investors, the improved risk sharing makes market returns more volatile and stock returns more correlated.
Item Type: | Article |
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Official URL: | https://www.sciencedirect.com/journal/journal-of-f... |
Additional Information: | © 2021 Elsevier B.V. |
Divisions: | Finance |
Subjects: | H Social Sciences > HG Finance |
JEL classification: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets |
Date Deposited: | 20 Jul 2020 12:48 |
Last Modified: | 07 Dec 2024 01:00 |
URI: | http://eprints.lse.ac.uk/id/eprint/105749 |
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