The Economic Impact of Index Investing
Review of Financial Studies, Forthcoming
85 Pages Posted: 26 Sep 2015 Last revised: 30 Jul 2018
Date Written: July 5, 2018
Abstract
We study the impact of index investing on firm performance by examining the link between commodity indices and firms that use index commodities. Around 2004, there was a dramatic increase in commodity index investing, an event referred to as the financialization of commodity markets. Following financialization, firms that use index commodities make worse production decisions, earn 40% lower profits, and have 6% higher costs. Consistent with a feedback channel in which market participants learn from prices, our results suggest that index investing distorts the price signal thereby generating a negative externality that impedes firms' ability to make production decisions.
Keywords: commodity markets, financialization, index investing, real economic impact
JEL Classification: G12, G14, Q02
Suggested Citation: Suggested Citation