Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments April 21, 2018 erstellt
Beschreibung:
We study the effect of the rise of indexing on price discovery. We show that this effect critically depends on the causes of the rise of indexing and the cost structure of information acquisition. If the rise of indexing is due to increased cost of participating in the non-index market, then the price informativeness of the non-index decreases. In contrast, if it is due to improved market transparency and thus lower profitability in the non-index market, then the price informativeness of the non-index increases. In both cases, the price informativeness of the index tends to increase (resp. decrease) and thus market risk premium decreases (resp. increases) if acquiring information in one market increases (resp. decreases) information acquisition cost in another market. In addition, after an exogenous rise of indexing, price informativeness in both index and non-index markets declines. Moreover, social welfare may increase with indexing and active investors may "free ride" on discretionary indexers' information acquisition in the index market. Our analysis provides testable implications that can help identify the driving force of the rise of indexing