publication . Article . Report . Preprint . 2010

On the Economic Consequences of Index-Linked Investing

Jeffrey Wurgler;
Open Access
  • Published: 01 Sep 2010 Journal: SSRN Electronic Journal (eissn: 1556-5068, Copyright policy)
  • Publisher: Elsevier BV
Abstract
Trillions of dollars are invested through index funds, exchange-traded funds, and other index derivatives. The benefits of index-linked investing are well-known, but the possible broader economic consequences are unstudied. I review research which suggests that index-linked investing is distorting stock prices and risk-return tradeoffs, which in turn may be distorting corporate investment and financing decisions, investor portfolio allocation decisions, fund manager skill assessments, and other choices and measures. These effects may intensify as index-linked investing continues to grow in popularity.
Persistent Identifiers
Subjects
free text keywords: Derivative (finance), Business, Style investing, Investment management, business.industry, Growth investing, Stock market index, Popularity, Index fund, Finance, Passive management, jel:G10, jel:G11, jel:G12, jel:G14, jel:G20

Ang, Andrew, R. Hodrick, Y. Xing, X. Zhang. “The Cross-Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006), pp. 259-299.

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