On the Economic Consequences of Index-Linked Investing

On the Economic Consequences of Index-Linked Investing -...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
NBER WORKING PAPER SERIES ON THE ECONOMIC CONSEQUENCES OF INDEX-LINKED INVESTING Jeffrey Wurgler Working Paper 16376 http://www.nber.org/papers/w16376 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2010 I am grateful for helpful comments by Malcolm Baker, John Campbell, Ned Elton, Steve Figlewski, Martin Gruber, Antti Petajisto, William Silber, and Robert Whitelaw. I am also grateful to Randall Morck and Fan Yang for permission to reproduce Figure 3. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. © 2010 by Jeffrey Wurgler. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
On the Economic Consequences of Index-Linked Investing Jeffrey Wurgler NBER Working Paper No. 16376 September 2010 JEL No. G10,G11,G12,G14,G20 ABSTRACT Trillions of dollars are invested through index funds, exchange-traded funds, and other index derivatives. The benefits of index-linked investing are well-known, but the possible broader economic consequences are unstudied. I review research which suggests that index-linked investing is distorting stock prices and risk-return tradeoffs, which in turn may be distorting corporate investment and financing decisions, investor portfolio allocation decisions, fund manager skill assessments, and other choices and measures. These effects may intensify as index-linked investing continues to grow in popularity. Jeffrey Wurgler Stern School of Business, Suite 9-190 New York University 44 West 4th Street New York, NY 10012 and NBER jwurgler@stern.nyu.edu
Background image of page 2
2 I. Introduction A market index summarizes the performance of a group of securities into one number. The use of stock market indices in particular has been growing exponentially for years. Since Charles Dow introduced his indices in 1884, the number of distinct stock market indices reported in the Wall Street Journal has increased roughly five percent per year, as shown in Figure 1. Today's Journal reports not just the DJIA and the S&P 500. It also reports on the Turkey Titans 20 and the Philadelphia Stock Exchange Oil Service Index. Markets are being tracked in more and more detail, and the figure suggests there is no end in sight. 1 The proliferation of indices reflects their ever-growing importance to the investment industry. Trillions of dollars are managed with some connection to an index, with the S&P500 and MSCI World being among the most popular equity indices. Institutional investors often ask a fund manager to beat a particular index. Individuals may wish to match one via an index fund. Hedgers, speculators, and fund managers may manage exposure to index members through index derivatives. While this article focuses on stock markets, indices and associated investment products have proliferated also in debt markets, commodities, currencies, and other asset classes. It is time to reflect on the broader economic consequences of these trends. I define
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 28

On the Economic Consequences of Index-Linked Investing -...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online