Abstract:*

We study how passive investing affects asset prices. Flows into passive funds disproportion ately raise the stock prices of the economy’s largest firms, and especially those large firms in high demand by noise traders. Because of this effect, the aggregate market can rise even when flows are entirely due to investors switching from active to passive strategies. Intuitively, passive flows increase the idiosyncratic risk of large firms in high demand, which discourages investors from correcting the flows’ effects on prices. Consistent with our theory, prices and idiosyncratic volatilities of the largest S&P500 firms rise the most following flows into that index.

*Co-authored with J. Jiang (Michigan State University)

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to finsec-abs@uva.nl if your are interested in attending this seminar.