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

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Listed:
  • Valentin Haddad
  • Paul Huebner
  • Erik Loualiche

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.

Suggested Citation

  • Valentin Haddad & Paul Huebner & Erik Loualiche, 2025. "How Competitive Is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing," American Economic Review, American Economic Association, vol. 115(3), pages 975-1018, March.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:3:p:975-1018
    DOI: 10.1257/aer.20230505
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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