How Does P How Does Passive Investing E esting Effect the Informational Efficiency of ect the Informational Efficiency of Prices?

Brice Corgnet, Mark DeSantis (), Yan Peng (), David Porter and Jason Shachat
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Mark DeSantis: Chapman University, Argyros School of Business and Economics; Economic Science Institute
Yan Peng: Xiamen University, Paula and Gregory Chow Institute for Studies in Economics

Working Papers from Chapman University, Economic Science Institute

Abstract: We investigate the causal efects of passive investing on informational efciency and market quality metrics by developing a novel laboratory experiment that introduces Index trackers with exogenous passive investment fows. We fnd that, while improving liquidity, Index tracking hurts informational efciency, confrming our main hypothesis. Furthermore, we observe violations of the law of one price, leading to widespread and persistent arbitrage opportunities. Additionally, our research uncovers that Active traders, particularly those with private information about asset values and high cognitive ability, reap benefts from the introduction of Index tracking.

Keywords: Passive Trading; Index Tracking Experimental Markets; Informational Efciency (search for similar items in EconPapers)
JEL-codes: C92 G12 G14 G41 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:24-02

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