On Index Investing

48 Pages Posted: 20 Oct 2017 Last revised: 8 May 2020

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Davidson Heath

University of Utah - David Eccles School of Business

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: May 6, 2020

Abstract

We empirically examine the effects of index investing. Consistent with equilibrium models such as Grossman and Stiglitz (1980), an increase in index investing leads to a reduction in information production, yet price informativeness is unchanged because investor behavior endogenously adjusts. Increased index investing leads to a decrease in Google search volume, EDGAR page views, and analyst reports, but does not limit trading by active investors. In fact, trading volume and short interest both rise while a variety of price informativeness measures are unchanged. Thus, while index investing changes investor composition and information production, it does not alter price informativeness.

Keywords: active management, arbitrageurs, index investing, limits to arbitrage, market efficiency, passive investing

JEL Classification: G12, G14

Suggested Citation

Coles, Jeffrey L. and Heath, Davidson and Ringgenberg, Matthew C., On Index Investing (May 6, 2020). 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)

Davidson Heath

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
528
Abstract Views
2,549
rank
57,086
PlumX Metrics