Further Analysis of the Liquidity and Information Components of Institutional Orders: Active Versus Passive Funds
27 Pages Posted: 7 Feb 2005
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: Suggested Citation