Download This PaperThe Shift From Active to Passive Investing: Potential Risks to Financial Stability?
Financial Analysts Journal 76(4): 23–29, 2020
33 PagesPosted: 16 Sep 2019Last revised: 6 May 2021
Kenechukwu Anadu
Federal Reserve Bank of Boston
Mathias S. Kruttli
Indiana University - Kelley School of Business
Patrick E. McCabe
Board of Governors of the Federal Reserve System
Emilio Osambela
Board of Governors of the Federal Reserve System
There are3 versions of this paper
The Shift From Active to Passive Investing: Potential Risks to Financial Stability?
The Shift from Active to Passive Investing: Potential Risks to Financial Stability?
The Shift from Active to Passive Investing: Potential Risks to Financial Stability?
Date Written: May 15, 2020
Abstract
The past couple of decades have seen a significant shift from active to passive investment strategies. We examine how this shift affects financial stability through its impacts on: (i) funds’ liquidity and redemption risks, (ii) asset-market volatility, (iii) asset-management industry concentration, and (iv) comovement of asset returns and liquidity. Overall, the shift appears to be increasing some risks and reducing others. Some passive strategies amplify market volatility, and the shift has increased industry concentration, but it has diminished some liquidity and redemption risks. Finally, evidence is mixed on the links between indexing and comovement of asset returns and liquidity.
Keywords: Asset Management, Passive Investing, Index Investing, Indexing, Mutual Fund, Exchange-Traded Fund, Leveraged and Inverse Exchange-Traded Products, Financial Stability, Systemic Risk, Market Volatility, Inclusion Effects
JEL Classification: G10, G11, G20, G23, G32, L1
Suggested Citation:Suggested Citation
Mathias S. Kruttli
Indiana University - Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
Patrick E. McCabe
Board of Governors of the Federal Reserve System (email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Emilio Osambela (Contact Author)
Board of Governors of the Federal Reserve System (email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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