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Market ecology of active and passive investors

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  • Capocci, Andrea
  • Zhang, Yi-Cheng

Abstract

We study the role of active and passive investors in an investment market with uncertainties. Active investors concentrate on a single or a few stocks with a given probability of determining the quality of them. Passive investors spread their investment uniformly, resembling buying the market index. In this toy market stocks are introduced as good and bad. If a stock receives sufficient investment it will survive, otherwise die. Active players exert a selective pressure since they can determine to an extent the investment quality. We show that the active players provide the driving force, whereas the passive ones act as free riders. While their gains do not differ too much, we show that the active players enjoy an edge. Their presence also provides better gains to the passive players and stocks themselves.

Suggested Citation

  • Capocci, Andrea & Zhang, Yi-Cheng, 2001. "Market ecology of active and passive investors," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 298(3), pages 488-498.
    • Handle: RePEc:eee:phsmap:v:298:y:2001:i:3:p:488-498
    DOI: 10.1016/S0378-4371(01)00256-4
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    Cited by:

    1. Levkov Nikola & Bogoevska-Gavrilova Irena & Trajkovska Milica, 2022. "Profile and Financial Behaviour of Crypto Adopters – Evidence from Macedonian Population Survey," South East European Journal of Economics and Business, Sciendo, vol. 17(2), pages 172-185, December.
    2. Li, Jinfang, 2022. "The sentiment pricing dynamics with short-term and long-term learning," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    3. Wang, Yougui & Stanley, H.E., 2009. "Statistical approach to partial equilibrium analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(7), pages 1173-1180.
    4. Maxime Markov & Vladimir Markov, 2022. "The impact of big winners on passive and active equity investment strategies," Papers 2210.09302, arXiv.org, revised Oct 2023.
    5. Zhang, Yi-Cheng, 2005. "Supply and demand law under limited information," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 350(2), pages 500-532.

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