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Index Funds and Stock Market Growth

Author

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  • Massimo Massa

    (INSEAD - Department of Finance)

  • William N. Goetzmann

    (Yale School of Management, International Center for Finance)

Abstract

Our analysis of daily index fund flows indicates a strong contemporaneous correlation between fund inflows and S&P market returns. We also document a strong negative correlation between fund out flows and S&P market returns with the exception of outflows from a back-end load fund. These effects may be interpreted in two ways. Either investor supply and demand affects S&P market prices, or investors condition their demand and supply on intra-day market fluctuations. To sort out these effects, we examine trailing investor reaction to market moves. Our results suggest the market reacts to daily demand. However, only negative reactions appear due to past returns. We investigate whether index investor demand shocks are permanent or temporary by examining the related behavior of the S&P futures index. Clear evidence supports the hypothesis that they are permanent. This result may help explain the unusual recent relative performance of the S&P 500 index. Using the average market-timing newsletter recommendation over the period, we find that investors appear to react to

Suggested Citation

  • Massimo Massa & William N. Goetzmann, 1999. "Index Funds and Stock Market Growth," Yale School of Management Working Papers ysm23, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm23
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    References listed on IDEAS

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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