On Index Investing

49 Pages Posted: 20 Oct 2017 Last revised: 11 Jun 2018

Jeffrey L. Coles

University of Utah - Department of Finance; Arizona State University (ASU) - Finance Department

Davidson Heath

University of Utah David Eccles School of Business

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: June 6, 2018

Abstract

We quantify the impact of index investing on stock prices. Using a regression discontinuity analysis around yearly Russell index reconstitutions, we find that index investing introduces noise into stock prices, but does not impact long-term price efficiency or trading by arbitrageurs. Stocks with more index investors have prices that deviate more from a random walk and exhibit higher correlations with index price movements. However, these stocks have no difference in turnover, trading volume, or earnings response coefficients. In other words, index investing introduces noise into prices, but it does not impact the ability of arbitrageurs to impound information into prices.

Keywords: Active Management, Index Investing, Market Efficiency, Passive Management

JEL Classification: G12, G14

Suggested Citation

Coles, Jeffrey L. and Heath, Davidson and Ringgenberg, Matthew C., On Index Investing (June 6, 2018). Available at SSRN: https://ssrn.com/abstract=3055324 or http://dx.doi.org/10.2139/ssrn.3055324

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-4475 (Phone)
480-965-8539 (Fax)

Davidson Heath

University of Utah David Eccles School of Business ( email )

Salt Lake City, UT 84112
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

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