Passive Investing and the Rise of Mega-Firms

Hao Jiang, Dimitri Vayanos and Lu Zheng

No 28253, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how passive investing affects asset prices. Flows into passive funds raise disproportionately the stock prices of the economy’s largest firms, and especially those large firms that the market overvalues. These effects are sufficiently strong to cause the aggregate market to rise even when flows are entirely due to investors switching from active to passive. Our results arise because flows create idiosyncratic volatility for large firms, which discourages investors from correcting the flows’ effects on prices. Consistent with our theory, the largest firms in the S&P500 experience the highest returns and increases in volatility following flows into that index.

JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cwa
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