How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing

56 Pages Posted: 7 Apr 2021 Last revised: 11 Apr 2024

See all articles by Valentin Haddad

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Paul Huebner

Stockholm School of Economics

Erik Loualiche

University of Minnesota, Finance

Date Written: April 7, 2021

Abstract

The conventional wisdom in finance is that competition is fierce among investors: if a group changes its behavior, others adjust their strategies such that nothing happens to prices.
We estimate a demand system with flexible strategic responses for institutional investors in the US stock market.
When less aggressive traders surround an investor, she adjusts by trading more aggressively.
However, this strategic reaction only counteracts two thirds of the impact of the initial change in behavior.
In light of these estimates, the rise in passive investing over the last 20 years has made the demand for individual stocks 11% more inelastic.

Keywords: Asset pricing model, Demand system, Institutional investors, Liquidity, Information, Portfolio choice

JEL Classification: G1, G2, D4, L1

Suggested Citation

Haddad, Valentin and Huebner, Paul and Loualiche, Erik, How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing (April 7, 2021). Available at SSRN: https://ssrn.com/abstract=3821263 or http://dx.doi.org/10.2139/ssrn.3821263

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul Huebner

Stockholm School of Economics ( email )

Stockholm
Sweden

Erik Loualiche (Contact Author)

University of Minnesota, Finance ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States
612 625 5679 (Phone)

HOME PAGE: http://https://loualiche.gitlab.io/www/

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