97 Pages Posted: 12 Aug 2013 Last revised: 9 May 2016
Date Written: April 7, 2016
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: Suggested Citation