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The passive investor puzzle

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  • Damir Tokic

    (ESC Rennes – International School of Business)

Abstract

The purpose of this article is to explain the ‘passive investor puzzle’. Specifically, we aim to explain why passive investors do not always behave as predicted by the efficient market hypothesis. We suggest that passive investors do not always behave as theoretically predicted, which is to buy (sell) when an asset is undervalued (overvalued), because: (1) passive investors may be able to estimate the fundamental value only within the very wide range; (2) passive investors deliberately participate in rational bubbles; and (3) there might be some tacit collusion between passive investors and rational speculators. On the basis of our analysis, we suggest that traders acting as rational speculators are likely to exploit potential market inefficiencies and profit at the expense of rational arbitragers.

Suggested Citation

  • Damir Tokic, 2012. "The passive investor puzzle," Journal of Asset Management, Palgrave Macmillan, vol. 13(2), pages 141-154, April.
    • Handle: RePEc:pal:assmgt:v:13:y:2012:i:2:d:10.1057_jam.2011.37
    DOI: 10.1057/jam.2011.37
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    References listed on IDEAS

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    Cited by:

    1. Kenneth David Strang, 2012. "Man versus math: Behaviorist exploration of post-crisis non-banking asset management," Journal of Asset Management, Palgrave Macmillan, vol. 13(5), pages 348-367, October.

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