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Benchmarking Intensity

Author

Listed:
  • Anna Pavlova
  • Taisiya Sikorskaya
  • Ralph Koijen

Abstract

Benchmarking incentivizes fund managers to invest a fraction of their funds’ assets in their benchmark indexes, and such demand is inelastic. We construct a measure of inelastic demand a stock attracts, benchmarking intensity (BMI), computed as its cumulative weight in all benchmarks, weighted by assets following each benchmark. Exploiting the Russell 1000/2000 cutoff, we show that changes in stocks’ BMIs instrument for changes in ownership of benchmarked investors. The resultant demand elasticities are low. We document that both active and passive fund managers buy additions to their benchmarks and sell deletions. Finally, an increase in BMI lowers future stock returns.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Anna Pavlova & Taisiya Sikorskaya & Ralph Koijen, 2023. "Benchmarking Intensity," The Review of Financial Studies, Society for Financial Studies, vol. 36(3), pages 859-903.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:3:p:859-903.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac055
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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