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How Index Trading Increases Market Vulnerability

Posted: 26 Mar 2012  

James X. Xiong

Ibbotson Associates

Rodney N Sullivan

AQR Capital Management

Date Written: March 26, 2012

Abstract

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

Suggested Citation

Xiong, James X. and Sullivan, Rodney N, How Index Trading Increases Market Vulnerability (March 26, 2012). Financial Analysts Journal, Vol. 68, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=2029299

James X. Xiong (Contact Author)

Ibbotson Associates ( email )

United States

Rodney N Sullivan

AQR Capital Management ( email )

Two Greenwich Plza
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqr.com/Home.aspx

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