Chabakauri, Georgy and Rytchkov, Oleg (2014) Asset pricing with index investing. Working papers , Social Science Research Network (SSRN), Rochester, USA.
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Abstract
We provide a novel theoretical analysis of how index investing affects capital market equilibrium. We consider a dynamic exchange economy with heterogeneous investors and two Lucas trees and find that indexing can either increase or decrease the correlation between stock returns and in general increases (decreases) volatilities and betas of stocks with larger (smaller) market capitalizations. Indexing also decreases market volatility and interest rates, although those effects are weak. The impact of index investing is particularly strong when stocks have heterogeneous fundamentals. Our results highlight that indexing changes not only how investors can trade but also their incentives to trade.
| Item Type: | Monograph (Working Paper) |
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| Official URL: | http://www.ssrn.com/ |
| Additional Information: | © 2014 The Authors |
| Library of Congress subject classification: | H Social Sciences > HG Finance |
| Journal of Economic Literature Classification System: | D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates |
| Sets: | Departments > Finance Collections > Economists Online |
| Funders: | Paul Woolley Centre, LSE |
| Date Deposited: | 14 Jan 2015 14:35 |
| URL: | http://eprints.lse.ac.uk/60739/ |
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