Work

How Competitive Is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing

Year: 2025

Type: article

Abstract: The conventional wisdom in finance is that competition is fierce among investors: if a group changes its behavior, others adjust their strategies such that nothing happens to prices. We estimate a demand system with flexible strategic responses for institutional investors in the US stock market. When less aggressive traders surround an investor, she adjusts by trading more aggressively. However, this strategic reaction only counteracts two-thirds of the impact of the initial change in behavior. In light of these estimates, the rise in passive investing over the last 20 years has made the demand for individual stocks 11 percent more inelastic. (JEL G11, G14, G23, G41)

Source: American Economic Review

DOI: 10.1257/aer.20230505

Authors: Valentin Haddad, Paul Huebner, Erik Loualiche

Institutions: University of California, Los Angeles, Stockholm School of Economics, University of Minnesota

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W4408028013

FWCI: 46.01

Cites: 93

Cited by: 117

Related to: 10