Effects of Passive Intensity on Aggregate Price Dynamics

29 Pages Posted: 17 Jul 2015

See all articles by Sina Ehsani

Sina Ehsani

Northern Illinois University

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2015

Abstract

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 an 8% 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 volatility.

Keywords: passive investment, comovement, systematic volatility, idiosyncratic volatility

JEL Classification: G10, G14

Suggested Citation

Ehsani, Sina and Lien, Donald, Effects of Passive Intensity on Aggregate Price Dynamics (August 2015). Financial Review, Vol. 50, Issue 3, pp. 363-391, 2015. Available at SSRN: https://ssrn.com/abstract=2631834 or http://dx.doi.org/10.1111/fire.12071

Sina Ehsani (Contact Author)

Northern Illinois University ( email )

Chicago, IL 60115
United States

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

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