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On the Economic Consequences of Index-Linked Investing

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  • Jeffrey Wurgler

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.

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File URL: http://www.nber.org/papers/w16376.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16376.

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Date of creation: Sep 2010
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Publication status: published as “On the Economic Consequences of Index - Linked Investing,” Challenges to Business in the Twenty - First Century: The Way Forward , edited by W.T. Allen, R. Khurana, J. Lorsch, and G. Rosenfeld, American Academy of Arts and Sciences, 2011.
Handle: RePEc:nbr:nberwo:16376

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  1. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2000. "Does Arbitrage Flatten Demand Curves for Stocks?," Yale School of Management Working Papers, Yale School of Management ysm152, Yale School of Management, revised 01 Nov 2001.
  2. Randall Morck & Fan Yang, 2001. "The Mysterious Growing Value of S&P 500 Membership," NBER Working Papers 8654, National Bureau of Economic Research, Inc.
  3. Markus K. Brunnermeier & Stefan Nagel, 2004. "Hedge Funds and the Technology Bubble," Journal of Finance, American Finance Association, American Finance Association, vol. 59(5), pages 2013-2040, October.
  4. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4829, C.E.P.R. Discussion Papers.
  5. Mark Carlson, 2006. "A brief history of the 1987 stock market crash with a discussion of the Federal Reserve response," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2007-13, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Eric Belasco & Michael Finke & David Nanigian, 2012. "The impact of passive investing on corporate valuations," Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 38(11), pages 1067-1084, November.
  2. Ben-David, Itzhak & Franzoni, Francesco & Moussawi, Rabih, 2011. "ETFs, Arbitrage, and Contagion," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2011-20, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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