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Index Funds Asset Prices and the Welfare of Investors

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6253
Author
Martin C. Schmalz William R. Zame
Category
Financial
Date Posted
2023/01/03
Date Retrieved
2023/03/18
Date Revised
2023/03/18
Date Written
2023/03/18
Description
We present a general equilibrium model in which heterogeneous investors choose among bonds stocks and an Index Fund holding the market portfolio. We show that under standard assumptions an equilibrium exists. We then derive predictions for equilibrium asset prices investor behavior and investor welfare. The presence of the index fund (or a decrease in the fee charged by the index fund) tends to increase stock market participation and thus increase asset prices and decrease expected returns from investing in the stock market. As a result few - if any - investors benefit from the availability of cheap market indexing.
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JEL Classifications
D14 D53 G11 G12 G23
Keywords
portfolio choice asset pricing ownership indexing inequality household finance
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Pages
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