The Distortion in Prices Due to Passive Investing

In the capital asset pricing model (CAPM), it is ex post optimal to index. To examine 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 efficiency of stocks diminishes, asset prices comove, and the statistical fit (measured by R 2 ) of the CAPM regression decreases. We also report asset prices at the limit, when 100% of the investors are market indexers. This paper was accepted by Tyler Shumway, finance.

• 저널Management Science · 68(8) · 6219–6234
• 토픽Financial Markets and Investment Strategies · Finance
• DOI10.1287/mnsc.2021.4114
• 저자Shmuel Baruch, Xiaodi Zhang