RT Journal Article
SR Electronic
T1 Index-Linked Investing—<em>A Curse for the Stability of Financial Markets around the Globe?</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 26
OP 43
DO 10.3905/jpm.2016.42.3.026
VO 42
IS 3
A1 Lidia Bolla
A1 Alexander Kohler
A1 Hagen Wittig
YR 2016
UL https://pm-research.com/content/42/3/26.abstract
AB The authors analyze the development of various risk commonalities in Europe and the United States, as well as in emerging markets, and find a substantial increase in the co-movements in trading patterns, price returns, and liquidity risk within equity markets. They test the hypothesis that index-linked investing is a major driver for the increase in risk commonality. By aggregating the data in a cross-regional perspective, the authors capitalize on the different levels of indexation in the markets and find statistically significant and economically relevant evidence that the growth in index-linked investing is related to the increased co-movement within equity markets. The results suggest a significant increase in market fragility around the globe, leading to an increased danger of more severe reactions to unanticipated events going forward. Portfolio managers are well-advised to account for the increased proportion of index-linked investing within their risk management tools, diversification approaches, and active management strategies.TOPICS: Emerging, in markets, manager selection