Passive investing and the rise of mega-firms

Hao Jiang, Dimitri Vayanos and Lu Zheng

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study how passive investing affects asset prices. Flows into passive funds disproportionately raise the stock prices of the economy’s largest firms, and especially those large firms in high demand by noise traders. Because of this effect, the aggregate market can rise even when flows are entirely due to investors switching from active to passive funds. Intuitively, passive flows increase the idiosyncratic risk of large firms in high demand, which discourages investors from correcting the flows’ effects on prices. Consistent with our theory, prices and idiosyncratic volatilities of the largest S&P500 firms rise the most following flows into that index.

Keywords: passive investing; fund flows; asset pricing; size distribution of firms (search for similar items in EconPapers)
JEL-codes: E44 G12 G23 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2025-12-31
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations:

Published in Review of Financial Studies, 31, December, 2025, 38(12), pp. 3461 - 3496. ISSN: 0893-9454

Downloads: (external link)
http://eprints.lse.ac.uk/128591/ Open access version. (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Unavailable (http://eprints.lse.ac.uk/128591/ [301 Moved Permanently]--> https://eprints.lse.ac.uk/128591/)

Related works:
Working Paper: Passive Investing and the Rise of Mega-Firms (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:128591

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().