Index Funds and Stock Market Growth

44 Pages Posted: 20 Sep 1998

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 1999


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 "expert" advice about the market. Bullish newsletter sentiment is associated with greater inflows, although outflows are not well explained by newsletter advice. Dispersion in advice is associated with lower inflows. We find a high correlation among a number of variables used as a proxy for investor disagreement.

JEL Classification: G1, G2

Suggested Citation

Massa, Massimo and Goetzmann, William N., Index Funds and Stock Market Growth (April 27, 1999). Available at SSRN: or

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William N. Goetzmann

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