Who Trades Index Rebalancings? Evidence on Benchmarking and Inelastic Demand

Mariana Escobar, Lorenzo Pandolfi, Alvaro Pedraza and Tomas Williams

No 21526, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Benchmark index rebalancings are widely used to study non-fundamental demand shocks, but the underlying trading is rarely observed. Exploiting transaction-level data from the Colombian stock market and additions and deletions of stocks from MSCI international equity indexes, we trace who generates benchmark-driven demand, who absorbs it, and how it affects prices. Index demand extends beyond explicit index funds and ETFs: benchmarked but nominally active foreign institutions account for most rebalancing-driven trading. Domestic investors absorb most of the shock, while arbitrage capital plays only a limited role. We show that stock demand curves are steep, especially when retail participation is larger.

JEL-codes: F32 G11 G15 (search for similar items in EconPapers)
Date: 2026-05
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