Index Investing Makes Stock Picking Harder?
June 25, 2015 - Big Ideas
How does growth in capitalization-weighted equity index investing affect the stock market? In the December 2014 update of their paper entitled “Indexing and Stock Price Efficiency”, Nan Qin and Vijay Singal examine the relationship between equity index investing (driven passively by liquidity trading and index changes, not actively by information) and stock price efficiency. They estimate equity index (passive) investing from holdings of 591 equity index mutual funds, enhanced index mutual funds, exchange-traded funds and closet indexers. They measure each stock’s passive (non-passive) ownership as the percentage of shares held by these funds (other funds) at the end of each quarter, with the lower bound of passive (non-passive) trading volume the absolute quarterly change in holdings of these (other) funds. They measure stock price efficiency by: (1) magnitude of post-earnings announcement drift (response to new information); and, (2) intraday and daily deviations of price from a random walk. Each quarter, they relate these measures of price inefficiency to level of index ownership across stocks. Using intraday and daily return, earnings announcement and quarterly fund holdings data for S&P 500 Index stocks and size/turnover-matched stocks during 2002 (post-decimalization) through 2013, they find that: Keep Reading