TITLE: INDEX-LINKED INVESTING: A CURSE FOR THE STABILITY OF FINANCIAL MARKETS AROUND THE GLOBE
Authors: L. BOLLA, A. KOHELER, and H. WHITTEY
Publication: JOURNAL OF PORTFOLIO MANAGEMENT • SPRING 2016
#ResearchQuestion: Does the growing share of index-linked investing around the world increase the co-movements in equity markets and therefore, decrease diversification?
#AcademicInsights: The authors find a substantial increase in the co-movement of stocks with respect to trading patterns, price returns and liquidity risks in the five markets analyzed: US, Europe, UK, Emerging Markets and Switzerland. They also find that one of the causes of this increased co-movement is linked to the growth in index-linked investing.
#Applications: The results of this study suggest an increased risk to global market fragility, which can lead to more severe reactions to unanticipated events. Investors need to keep this into consideration when building their portfolios. For instance, it will be important to diversify into several asset classes and in particular to have some exposure to those with a smaller share of indexing.