The Economic Impact of Index Investing

NBER Market Microstructure Meeting Paper (2015)

Washington University in St. Louis Center for Finance and Accounting Research Working Paper No. 15/06

60 Pages Posted: 26 Sep 2015 Last revised: 4 Apr 2017

Jonathan Brogaard

University of Washington - Department of Finance and Business Economics

Matthew Ringgenberg

University of Utah - Department of Finance

David Sovich

Washington University in St. Louis - John M. Olin Business School

Date Written: March 28, 2017

Abstract

We study the impact of index investing on firm performance by examining the link between commodity indices and firms that use index commodities. Starting in 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 and earn lower profits. Consistent with a feedback channel in which market participants learn from prices, our results suggest that index investing in financial markets 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

Brogaard, Jonathan and Ringgenberg, Matthew and Sovich, David, The Economic Impact of Index Investing (March 28, 2017). NBER Market Microstructure Meeting Paper (2015); Washington University in St. Louis Center for Finance and Accounting Research Working Paper No. 15/06. Available at SSRN: https://ssrn.com/abstract=2663398 or http://dx.doi.org/10.2139/ssrn.2663398

Jonathan Brogaard

University of Washington - Department of Finance and Business Economics ( email )

Box 353226
Seattle, WA 98195
United States

Matthew C. Ringgenberg (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

David Sovich

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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