The Market Impact of Passive Trading

Journal of Trading, vol. 10, no. 3, Summer 2015

Posted: 8 Feb 2017

See all articles by Max Moroz

Max Moroz

Research Affiliates, LLC

Michael Aked

Research Affiliates, LLC

Date Written: July 1, 2015

Abstract

Implementing a passive strategy with significant assets under management affects market values and thus gives rise to implicit costs in addition to the explicit costs, such as commissions and transaction-related fees. This article presents a conceptual framework and mathematical model for decomposing implicit trading costs and comparing them across active, passive, and smart beta strategies that do not involve frequent trading. The proposed framework, which improves on the weighted-average market capitalization/turnover approach, is intended to help providers and investors evaluate the investability or capacity of index-based strategies.

Suggested Citation

Moroz, Max and Aked, Michael, The Market Impact of Passive Trading (July 1, 2015). Journal of Trading, vol. 10, no. 3, Summer 2015, Available at SSRN: https://ssrn.com/abstract=2913300

Max Moroz

Research Affiliates, LLC ( email )

620 Newport Center Drive
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://researchaffiliates.com/index.htm

Michael Aked (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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