• Lasse Mejlholm Larsen
The paper seeks to investigate the influence of growing volumes in passive index funds on market volatility and
efficiency in the United States. Existing literature strongly asserts that the inclusion of stocks in indexes leads to
increased volatility due to the trading patterns being influenced by passive investors following a specific set of
rules. However, the findings regarding market efficiency have been inconclusive. Some studies suggest a decline
in price discovery and an increase in return co-movement, which negatively affect market efficiency. On the
other hand, increasing trading volumes, narrowing bid-ask spreads, and enhanced liquidity indicate a potential
positive impact. To estimate the portion of the S&P 500 index held by ETFs, data on ETFs’ assets under
management were utilized. Valuation metrics were employed to assess price discovery, and data on S&P 500
index additions during the period of 2015-2017 were collected to analyze changes in volatility and market
efficiency. The findings indicate an increase in volatility, an increase in return co-movement, a rise in trading
volume, a widening bid-ask spread, and mixed results relating to the change in liquidity.
Publication date1 Jun 2023
Number of pages49
ID: 532493075