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Passive Investors, Active Traders and Strategic Delegation of Price Discovery

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  • Jezek, M.

Abstract

The concept of rational performance-chasing equilibrium in recent literature is supported neither by theory nor by empirical evidence. A more accurate model of such market dynamics is based on investor confusion, which is partly driven by some active managers' performance manipulation. Unlike the former, the incentive structure in the latter model is fragile and not robust to social learning. More rationality means more passive informationless investing, which may ultimately lead to less efficient prices and greater misallocation of real resources. The recent growth of index products may continue unabated since there is no invisible hand that would limit it.

Suggested Citation

  • Jezek, M., 2009. "Passive Investors, Active Traders and Strategic Delegation of Price Discovery," Cambridge Working Papers in Economics 0951, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0951
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    More about this item

    Keywords

    Passive vs. active investing; performance manipulation; market efficiency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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