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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.

Suggested Citation

  • Jeffrey Wurgler, 2010. "On the Economic Consequences of Index-Linked Investing," NBER Working Papers 16376, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16376
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    References listed on IDEAS

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    1. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    2. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    3. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers 4829, C.E.P.R. Discussion Papers.
    4. Markus K. Brunnermeier & Stefan Nagel, 2004. "Hedge Funds and the Technology Bubble," Journal of Finance, American Finance Association, vol. 59(5), pages 2013-2040, October.
    5. Randall Morck & Fan Yang, 2001. "The Mysterious Growing Value of S&P 500 Membership," NBER Working Papers 8654, National Bureau of Economic Research, Inc.
    6. Mark A. Carlson, 2006. "A brief history of the 1987 stock market crash with a discussion of the Federal Reserve response," Finance and Economics Discussion Series 2007-13, Board of Governors of the Federal Reserve System (U.S.).
    7. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross-Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
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    Cited by:

    1. repec:eee:jbfina:v:91:y:2018:i:c:p:19-33 is not listed on IDEAS
    2. Tomas Williams, 2017. "Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market," Working Papers 2017-12, The George Washington University, Institute for International Economic Policy.
    3. Eric Belasco & Michael Finke & David Nanigian, 2012. "The impact of passive investing on corporate valuations," Managerial Finance, Emerald Group Publishing, vol. 38(11), pages 1067-1084, September.
    4. repec:bis:bisqtr:1803j is not listed on IDEAS
    5. repec:eee:quaeco:v:68:y:2018:i:c:p:143-157 is not listed on IDEAS
    6. Ben-David, Itzhak & Franzoni, Francesco & Moussawi, Rabih, 2011. "ETFs, Arbitrage, and Contagion," Working Paper Series 2011-20, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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