The Shift From Active to Passive Investing: Potential Risks to Financial Stability?

33 Pages Posted: 16 Sep 2019 Last revised: 19 May 2020

See all articles by Kenechukwu Anadu

Kenechukwu Anadu

Federal Reserve Banks - Federal Reserve Bank of Boston; Babson College

Mathias S. Kruttli

Board of Governors of the Federal Reserve System; University of Oxford - Oxford-Man Institute of Quantitative Finance

Patrick E. McCabe

Board of Governors of the Federal Reserve System

Emilio Osambela

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: May 15, 2020

Abstract

The past couple of decades have seen a significant shift from active to passive investment strategies. We examine how this shift affects financial stability through its impacts on: (i) funds’ liquidity and redemption risks, (ii) asset-market volatility, (iii) asset-management industry concentration, and (iv) comovement of asset returns and liquidity. Overall, the shift appears to be increasing some risks and reducing others. Some passive strategies amplify market volatility, and the shift has increased industry concentration, but it has diminished some liquidity and redemption risks. Finally, evidence is mixed on the links between indexing and comovement of asset returns and liquidity.

Keywords: Asset Management, Passive Investing, Index Investing, Indexing, Mutual Fund, Exchange-Traded Fund, Leveraged and Inverse Exchange-Traded Products, Financial Stability, Systemic Risk, Market Volatility, Inclusion Effects

JEL Classification: G10, G11, G20, G23, G32, L1

Suggested Citation

Anadu, Kenechukwu and Kruttli, Mathias S. and McCabe, Patrick E. and Osambela, Emilio, The Shift From Active to Passive Investing: Potential Risks to Financial Stability? (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3244467 or http://dx.doi.org/10.2139/ssrn.3244467

Kenechukwu Anadu

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Babson College ( email )

231 Forest St.
Babson Park, MA 02457-0310
United States

Mathias S. Kruttli

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/mathias-s-kruttli.htm

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

HOME PAGE: http://sites.google.com/site/mathiaskruttli/home

Patrick E. McCabe

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Emilio Osambela (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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