Academic Research on Passive Investing

Here is our collection of papers

Sharpening the Arithmetic of Active Management by Lasse Heje Pedersen (AQR Capital Management, Copenhagen Business School and New York University)

In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis by Xavier Gabaix (Harvard University) and Ralph S. J. Koijen (University of Chicago, Booth School of Business)

Passive Investing and the Rise of Mega-Firms by Hao Jiang (Michigan State University), Dimitri Vayanos (London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)), Lu Zheng (University of California, Irvine )

How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing by Valentin Haddad (University of California, Los Angeles (UCLA) ),  Paul Huebner (Stockholm School of Economics), Erik Loualiche (University of Minnesota)

Monetary Transmission and Portfolio Rebalancing: A Cross-Sectional Approach by Xu Lu (Stanford Graduate School of Business), and Lingxuan Wu (Harvard University)

Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds by Jonathan A. Parker (Massachusetts Institute of Technology), Antoinette Schoar (Massachusetts Institute of Technology), and Yang Sun (Brandeis University)

Tracking Biased Weights: Asset Pricing Implications of Value-Weighted Indexing by Hao Jiang (Michigan State University), Dimitri Vayanos (London School of Economics), and Lu Zheng (University of California at Irvine) – “We show theoretically and empirically that flows into index funds raise the prices of large stocks in the index disproportionately more than the prices of small stocks. Conversely, flows predict a high future return of the small-minus-large index portfolio. This finding runs counter to the CAPM, and arises when noise traders distort prices, biasing index weights.”

Comovement by Nicholas Barberis (University of Chicago), Andrei Shleifer (Harvard University), and Jeffrey Wurgler (New York University)

The Shift from Active to Passive Investing: Potential Risks to Financial Stability? by Kenechukwu Anadu, Mathias Kruttli, Patrick McCabe, and Emilio Osambela (Washington: Board of Governors of the Federal Reserve System)

The Impact of Active and Passive Investment on Market Efficiency: A Simulation Study by Patrick Jaquart, Marvin Motz, Lutz Kohler, and Christof Weinhardt (Karlsruhe Institute of Technology, Germany) – “Furthermore, we find that a large fraction of passive investors within a market may facilitate technical price bubbles, resulting in market failure.”

Passive In Name Only: Delegated Management and “Index” Investing by Adriana Z. Robertson (University of Toronto Faculty of Law and Rotman School of Management)

Index Funds and Stock Market Growth by William N. Goetzmann (Yale School of Management) and Massimo Massa (INSEAD)

We find evidence of a strong same-day relationship between demand for
index fund shares and the movement of the S&P 500.

Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk by Jan Fichtner,
Eelke M. Heemskerk, and Javier Garcia-Bernardo (University of Amsterdam)

“Since 2008, a massive shift has occurred from active toward passive investment strategies. The passive index fund industry is dominated by BlackRock, Vanguard, and State Street, which we call the “Big Three.” We comprehensively map the ownership of the Big Three in the United States and find that together they constitute the largest shareholder in 88 percent of the S&P 500 firms. In contrast to active funds, the Big Three hold relatively illiquid and permanent ownership positions.”

The Distortion in Prices Due to Passive Investing by Shmuel Baruch (University of Rome) and Xiaodi  (Shanghai University of
Finance and Economics)

We show that, as more nonindexers become indexers, the price efficiency of stocks diminishes, asset prices comove, and the statistical fit (measured by R²) of the CAPM regression decreases. We also report asset prices at the limit, when 100% of the investors are market
indexers.

The Implications of Passive Investing for Securities Markets by Vladyslav Sushko (Bank for International Settlements) and Grant Turner (Bank for International Settlements)

A shift towards passive investing could affect securities markets in two key ways. First, it could result in higher correlation of returns and less security-specific price information. Second, it could affect aggregate investment fund flows and market price dynamics.

The Shift From Active to Passive Investing: Potential Risks to Financial Stability? by Kenechukwu Anadu (Federal Reserve Bank of Boston), Mathias S. Kruttli (Kelley Business School – Indiana University; University of Oxford – Oxford-Man Institute of Quantitative Finance, Patrick E. McCabe (Board of Governors of the Federal Reserve System), Emilio Osambela (Board of Governors of the Federal Reserve System)

The Dark Side of Passive Investing by David Blitz, PhD (Robeco)

Lorie and Hamilton (1973) already noted that the market can only be efficient if a large number of investors actually believe it to be inefficient, the so-called efficient markets
paradox. In other words, the existence of a large number of active investors is a necessary requirement for efficiently functioning capital markets. Active investors continuously trade
on perceived mispricings, thereby ensuring that the price of each security always reflects the market’s best assessment of its (unobservable) true value, and that the market is
highly liquid. As such, active investors play a vital role in financial markets. Passive investors, on the other hand, are basically free-riders, as they do not make any attempt to
assess the fair value of a security. Instead, they assume that active investors have done their homework properly, which enables them to simply accept and mechanically follow
the observed security weights in the capitalization-weighted market portfolio. Passive investing is impossible without active investors

Link to article on Haddad paper

The Passive-Ownership Share Is Double What You Think It Is by Alex Chinco (Baruch College, Zicklin School of Business) and Marco Sammon (Harvard Business School)

Could Index Funds Be Worse than Marxism? Atlantic article