Passive Investors, Active Traders and Strategic Delegation of Price Discovery

Michal Jezek

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The concept of rational performance-chasing equilibrium in recent literature is supported neither by theory nor by empirical evidence. A more accurate model of such market dynamics is based on investor confusion, which is partly driven by some active managers' performance manipulation. Unlike the former, the incentive structure in the latter model is fragile and not robust to social learning. More rationality means more passive informationless investing, which may ultimately lead to less efficient prices and greater misallocation of real resources. The recent growth of index products may continue unabated since there is no invisible hand that would limit it.

Keywords: Passive vs. active investing; performance manipulation; market efficiency (search for similar items in EconPapers)
JEL-codes: G10 G11 G14 (search for similar items in EconPapers)
Date: 2009-12-16
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