Benchmarking Intensity

75 Pages Posted: 2 Nov 2020 Last revised: 10 Jun 2021

See all articles by Anna Pavlova

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Taisiya Sikorskaya

London Business School

Date Written: June 10, 2021

Abstract

Benchmarking incentivizes fund managers to invest a fraction of their funds’ assets in their benchmark indices, and such demand is inelastic. We construct a measure of inelastic demand a stock attracts, benchmarking intensity (BMI), computed as its cumulative weight in all benchmarks, weighted by assets following each benchmark. Exploiting the Russell 1000/2000 cutoff, we show that changes in stocks’ BMIs instrument for changes in ownership of benchmarked investors. The resulting demand elasticities are low. We document that both active and passive fund managers buy additions to their benchmarks and sell deletions. Finally, an increase in BMI lowers future stock returns.

Keywords: Benchmark, preferred habitat, index effect, demand elasticity, mutual funds, Russell cutoff

JEL Classification: G11, G12

Suggested Citation

Pavlova, Anna and Sikorskaya, Taisiya, Benchmarking Intensity (June 10, 2021). Available at SSRN: https://ssrn.com/abstract=3689959 or http://dx.doi.org/10.2139/ssrn.3689959

Anna Pavlova (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://faculty.london.edu/apavlova

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Taisiya Sikorskaya

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://https://www.london.edu/

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