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On the Economic Consequences of Index-Linked Investing

CHALLENGES TO BUSINESSES IN THE TWENTY-FIRST CENTURY: THE WAY FORWARD, W.T. Allen, R. Khurana, J. Lorsch, G. Rosenfeld, eds., 2010

27 Pages Posted: 30 Aug 2010  

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 24, 2010

Abstract

Trillions of dollars are invested through index funds, exchange-traded funds, and other index derivatives. The benefits of index-linked investing are well-known, but the possible broader economic consequences are unstudied. I review research which suggests that index-linked investing is distorting stock prices and risk-return tradeoffs, which in turn may be distorting corporate investment and financing decisions, investor portfolio allocation decisions, fund manager skill assessments, and other choices and measures. These effects may intensify as index-linked investing continues to grow in popularity.

Keywords: indexing, index fund, ETF, comovement

JEL Classification: G11, G12, G14, G23, G31

Suggested Citation

Wurgler, Jeffrey, On the Economic Consequences of Index-Linked Investing (July 24, 2010). CHALLENGES TO BUSINESSES IN THE TWENTY-FIRST CENTURY: THE WAY FORWARD, W.T. Allen, R. Khurana, J. Lorsch, G. Rosenfeld, eds., 2010. Available at SSRN: https://ssrn.com/abstract=1667188 or http://dx.doi.org/10.2139/ssrn.1667188

Jeffrey A. Wurgler (Contact Author)

NYU Stern School of Business ( email )

Stern School of Business
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HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

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