The Impact of Passive Investing on Market Fragility
10 Pages Posted: 1 Nov 2016 Last revised: 2 Nov 2016
Date Written: May 31, 2016
A simple theoretical model with active and passive investors is proposed. The model implies that in the bullish time the presence of passive investors enhances the growth of prices while in the bearish time enhances the declines. Therefore the growing popularity of passive investment funds, especially highly liquid ETFs, can have negative consequences and increases market fragility what is supported by the empirical evidence.
Keywords: passive investing, market fragility
JEL Classification: G10
Suggested Citation: Suggested Citation