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How Does P How Does Passive Investing E esting Effect the Informational Efficiency of ect the Informational Efficiency of Prices?

Author

Listed:
  • Brice Corgnet

    (Emlyon Business School, GATE UMR)

  • Mark DeSantis

    (Chapman University, Argyros School of Business and Economics; Economic Science Institute)

  • Yan Peng

    (Xiamen University, Paula and Gregory Chow Institute for Studies in Economics)

  • David Porter

    (Economic Science Institute, Chapman University)

  • Jason Shachat

    (Durham University, Durham University Business School)

Abstract

We investigate the causal efects of passive investing on informational efciency and market quality metrics by developing a novel laboratory experiment that introduces Index trackers with exogenous passive investment fows. We fnd that, while improving liquidity, Index tracking hurts informational efciency, confrming our main hypothesis. Furthermore, we observe violations of the law of one price, leading to widespread and persistent arbitrage opportunities. Additionally, our research uncovers that Active traders, particularly those with private information about asset values and high cognitive ability, reap benefts from the introduction of Index tracking.

Suggested Citation

  • Brice Corgnet & Mark DeSantis & Yan Peng & David Porter & Jason Shachat, 2024. "How Does P How Does Passive Investing E esting Effect the Informational Efficiency of ect the Informational Efficiency of Prices?," Working Papers 24-02, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:24-02
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/398/
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    More about this item

    Keywords

    Passive Trading; Index Tracking Experimental Markets; Informational Efciency;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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