How Index Trading Increases Market Vulnerability
Posted: 26 Mar 2012
Date Written: March 26, 2012
The authors found that the rise in popularity of index trading — assets invested in index funds reached more than $1 trillion at the end of 2010 — contributes to higher systematic equity market risk. More equity index trading corresponds to increased cross-sectional trading commonality, which precipitates higher return correlations among stocks. Consistent with the accelerating growth of passive trading, the authors found that equity betas have not only risen but also converged in recent years.
Keywords: Equity Investments, Equity Markets, Characteristics, Institutions, and Benchmarks, Security Market Indices and Benchmarks, Portfolio Management, Equity Portfolio Management Strategies, Passive Management, Mutual Funds, Pooled Funds, and Exchange-Traded Funds (ETFs), Risk Management, Risk Management
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