Indexers and Comovement

97 Pages Posted: 12 Aug 2013 Last revised: 9 May 2016

Vincent Gregoire

University of Melbourne - Department of Finance

Date Written: April 7, 2016

Abstract

I introduce a general equilibrium model with active investors and indexers. Indexing causes market segmentation, and the degree of segmentation is a function of the relative wealth of indexers in the economy. Shocks to this relative wealth induce correlated shocks to discount rates of index stocks. The wealthier indexers are, the greater the resulting comovement is. I confirm empirically that S&P 500 stocks comove more with other index stocks and less with non-index stocks, and that changes in passive holdings of S&P 500 stocks predict changes in comovement of index stocks.

Keywords: Indexing, Comovement, Asset Pricing, General Equilibrium

JEL Classification: G11, G12, G14

Suggested Citation

Gregoire, Vincent, Indexers and Comovement (April 7, 2016). Available at SSRN: https://ssrn.com/abstract=2308695 or http://dx.doi.org/10.2139/ssrn.2308695

Vincent Gregoire (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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