Portfolio concentration and equity market contagion: evidence on the “flight to familiarity†across indexing methods

Lars Kaiser

Journal of Investment Strategies

Abstract: This paper sheds light on the entanglement of index weighting schemes. First, we show that a high degree of absolute holdings overlap is not a sufficient measure of the level of conformity with a benchmark. Second, we take a closer look at portfolio concentration and equity market contagion. We monitor a pattern where index weighting schemes experience highly correlated returns after 2008, alongside a drop in relative portfolio holdings overlap during periods of increased market volatility. We are able to show that portfolio concentration is caused by a “flight to familiarity†and, as such, the impact of equity market contagion is largely consistent across alternative index weighting schemes.

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