Affiliation:
1. Department of Economics and Finance, University of Rome Tor Vergata, Rome 00133, Italy;
2. School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China
Abstract
In the capital asset pricing model (CAPM), it is ex post optimal to index. To examine the implications of market indexing, we develop a conditional CAPM with costless private information in which some investors are, for exogenous reasons, ex ante indexers. We show that, as more nonindexers become indexers, the price efficiency of stocks diminishes, asset prices comove, and the statistical fit (measured by R2) of the CAPM regression decreases. We also report asset prices at the limit, when 100% of the investors are market indexers. This paper was accepted by Tyler Shumway, finance.
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Subject
Management Science and Operations Research,Strategy and Management
Cited by
10 articles.
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