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The relevance of index funds for pension investment in equities

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  • Shah, Ajay
  • Fernandes, Kshama

Abstract

The rise of index funds over the past 25 years has been a remarkable phenomenon. The traditional rationale for the success of index funds is market efficiency, net of transaction costs. The authors also focus on the role of agency conflicts between fund managers and investors, which are hard to resolve, given the low power of statistical tests of performance. Most of the empirical evidence about the superiority of index funds comes from the United States. The authors discuss issues associated with the application of index funds in developing countries, as well as policy issues in the financial sector that affect the enabling market infrastructure for index funds. They also apply these ideas to thinking about the relevance of index funds for pension investment. The equity premium provides powerful motivation for equity investment by pension funds. Index funds make it possible to sidestep the complexities of forming contracts and monitoring institutions to govern fund managers. In developing countries that seek to use index funds in pension investment, there are avenues through which policymakers can make index funds more viable. In many countries there are significant avenues for improving construction of the market index as well as market mechanisms used in the equity market.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2494.

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Date of creation: 30 Nov 2000
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Handle: RePEc:wbk:wbrwps:2494

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Related research

Keywords: Agricultural Knowledge&Information Systems; Payment Systems&Infrastructure; Economic Theory&Research; Markets and Market Access; Access to Markets;

References

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  1. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
  2. Harris, Lawrence E & Gurel, Eitan, 1986. " Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-29, September.
  3. Nicholas Economides & Robert Schwartz,, . "Electronic Call Market Trading," Financial Networks _001, Economics of Networks.
  4. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
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Cited by:
  1. James,Estelle & Smalhout, James & Vittas, Dimitri, 2001. "Administrative costs and the organization of individual retirement account systems : a comparative perspective," Policy Research Working Paper Series 2554, The World Bank.
  2. Lane, Philip R. & Schmukler, Sergio L., 2007. "The international financial integration of China and India," Policy Research Working Paper Series 4132, The World Bank.
  3. Whitehouse, Edward, 2000. "Paying for pensions: An international comparison of administrative charges in funded retirement-income systems," MPRA Paper 14171, University Library of Munich, Germany.
  4. Whitehouse, Edward, 2000. "Administrative charges for funded pensions : an international comparison and assessment," Social Protection Discussion Papers 23140, The World Bank.

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