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

Lars Kaiser

University of Liechtenstein

Date Written: January 3, 2017

Abstract

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

Kaiser, Lars, Portfolio Concentration and Equity Market Contagion: Evidence on the ‘Flight To Familiarity’ Across Indexing Methods (January 3, 2017). 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.. Available at SSRN: https://ssrn.com/abstract=2529972 or http://dx.doi.org/10.2139/ssrn.2529972

Lars Kaiser (Contact Author)

University of Liechtenstein ( email )

Fürst Franz Josef Strasse
Vaduz, 9490
Liechtenstein
+423 265 1186 (Phone)

HOME PAGE: http://www.uni.li/lars.kaiser

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