The Implications of Passive Investing on Market Volatility and Efficiency: Investigating the Consequences of Passive Investing on the S&P 500 Index and Stocks Added to the Index During 2015-2017
Translated title
The Implications of Passive Investing on Market Volatility and Efficiency
Author
Term
4. semester
Publication year
2023
Submitted on
2023-06-01
Pages
49
Abstract
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.
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