Effects of Passive Intensity on Aggregate Price Dynamics
39 Pages Posted: 17 Aug 2014 Last revised: 9 Jun 2015
Date Written: August 14, 2014
We find that passive intensity (PI), measured by the passive-linked share of total stock market trading volume, is strongly related to the overall pattern of stock price movements. A one-standard deviation increase in PI is associated with 8 percent higher price synchronicity. We further investigate the channels through which this relation is established by separately analyzing its impact on aggregate systematic and idiosyncratic volatility of stock returns. PI has a positive effect on systematic volatility and a negative impact on firm-specific volatility. Consistent with the effect of passive-trading on price dynamics, we find evidence that PI is negatively associated with mutual funds alpha dissimilarity. After controlling for market and idiosyncratic volatility, a one-standard deviation increase in PI corresponds to a 0.20% decrease in fund dissimilarity. Our findings are robust after controlling for various macro and corporate factors known to affect systematic or firm-specific volatilities.
Keywords: passive investment, price dynamics, comovement, synchronism, systematic volatility, idiosyncratic volatility
JEL Classification: G10, G14
Suggested Citation: Suggested Citation