Who Trades Index Rebalancings? Evidence on Benchmarking and Inelastic Demand

Mariana Escobar (), Lorenzo Pandolfi (), Alvaro Pedraza () and Tomas Williams ()

No 2026-008, Working Papers from The George Washington University, The Center for Economic 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.

Keywords: index rebalancings; institutional investors; stock demand elasticity; passive funds; benchmarking; inelastic market hypothesis. (search for similar items in EconPapers)
JEL-codes: F32 G11 G15 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2026-05
New Economics Papers: this item is included in nep-mst
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