This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. Forthcoming Articles
  5. How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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

  • Valentin Haddad
  • Paul Huebner
  • Erik Loualiche
American Economic Review (Forthcoming)

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% more inelastic.

Downloads