Portfolio Concentration and Equity Market Contagion: Evidence on the ‘Flight To Familiarity’ Across Indexing Methods
Kaiser, L. 2017. Portfolio concentration and equity market contagion: evidence on the “flight to familiarity” across indexing methods. Journal of Investment Strategies 7(1), 1-20.
30 Pages Posted: 25 Nov 2014 Last revised: 14 Nov 2017
Date Written: January 3, 2017
This paper sheds light on the entanglement of index weighting schemes. First, we show that a high degree of absolute holdings overlap is not a sufficient measure of the level of conformity with a benchmark. Second, we take a closer look at portfolio concentration and equity market contagion. We monitor a pattern where index weighting schemes experience highly correlated returns after 2008, alongside a drop in relative portfolio holdings overlap during periods of increased market volatility.We are able to showthat portfolio concentration is caused by a “flight to familiarity” and, as such, the impact of equity market contagion is largely consistent across alternative index weighting schemes.
Keywords: enhanced indexing, full replication, sampling, cross-sectional variance, dispersion, active share, tracking error
JEL Classification: G11
Suggested Citation: Suggested Citation