Working Paper: NBER ID: w20072
Authors: Robert F. Stambaugh
Abstract: During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as well as shifts by active managers toward lower fees and more index-like investing. I develop an equilibrium model linking these investment trends to the decline in individual ownership, interpreting the latter as a reduction in noise trading. Active management corrects most noise-trader induced mispricing, and the fraction left uncorrected shrinks as noise traders' stake in the market declines. Less mispricing then dictates a smaller footprint for active management.
Keywords: No keywords provided
JEL Codes: G10; G11; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in individual ownership of equity (noise trading) (G40) | Reduction in market mispricing (G19) |
| Reduction in market mispricing (G19) | Smaller footprint for active management (L25) |
| Decline in noise trading (G14) | Smaller footprint for active management (L25) |