Further Analysis of the Liquidity and Information Components of Institutional Orders: Active Versus Passive Funds

27 Pages Posted: 7 Feb 2005

See all articles by Alex Frino

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Teddy Oetomo

Schroder Investment Management Indonesia

David R. Gallagher

Rozetta Institute

Abstract

Previous research examining the price impact of institutional trading concludes that index funds incur higher liquidity costs due to the higher demand for trading immediacy. However, this conclusion has only been inferred by comparing the total price impact of active and index funds. This study extends the literature by examining the price impact components of both active and index funds' trades. Index fund trades incur higher liquidity costs and generate lower returns than active funds' trades. Indeed, the evidence presented in this study reveals the execution costs of index funds' trades are entirely liquidity-driven.

Keywords: Price impact, transaction costs, index fund, active fund

JEL Classification: G20

Suggested Citation

Frino, Alex and Oetomo, Teddy and Gallagher, David R., Further Analysis of the Liquidity and Information Components of Institutional Orders: Active Versus Passive Funds. Available at SSRN: https://ssrn.com/abstract=662443 or http://dx.doi.org/10.2139/ssrn.662443

Alex Frino (Contact Author)

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Teddy Oetomo

Schroder Investment Management Indonesia ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

David R. Gallagher

Rozetta Institute ( email )

Sydney

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