In the capital asset pricing model (CAPM), it is ex post optimal to index. To ex- amine the implications of market indexing, we develop a conditional CAPM with costless private information in which some investors are, for exogenous reasons, ex ante indexers. We show that, as more nonindexers become indexers, the price ef!ciency of stocks dimin- ishes, asset prices comove, and the statistical !t (measured by R2) of the CAPM regression decreases. We also report asset prices at the limit, when 100% of the investors are market indexers.
Baruch, S., Zhang, X. (2021). The Distortion in Prices Due to Passive Investing. MANAGEMENT SCIENCE, 68, 6219-6234 [10.1287/mnsc.2021.4114].
The Distortion in Prices Due to Passive Investing
Baruch, Shmuel;
2021-01-01
Abstract
In the capital asset pricing model (CAPM), it is ex post optimal to index. To ex- amine the implications of market indexing, we develop a conditional CAPM with costless private information in which some investors are, for exogenous reasons, ex ante indexers. We show that, as more nonindexers become indexers, the price ef!ciency of stocks dimin- ishes, asset prices comove, and the statistical !t (measured by R2) of the CAPM regression decreases. We also report asset prices at the limit, when 100% of the investors are market indexers.| File | Dimensione | Formato | |
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