Working Paper: NBER ID: w27402
Authors: Ralph S. J. Koijen; Robert J. Richmond; Motohiro Yogo
Abstract: Based on an asset demand system, we develop a framework to quantify the impact of market trends and changes in regulation on asset prices, price informativeness, and the wealth distribution. Our leading applications are the transition from active to passive investment management and climate-induced shifts in asset demand. The transition from active to passive investment management had a large impact on equity prices but a small impact on price informativeness because capital did not flow from more to less informed investors on average. This finding is based on a new measure of investor-level informativeness that identifies which investors are more informed about future profitability. Climate-induced shifts in asset demand have a potentially large impact on equity prices and the wealth distribution, implying capital gains for passive investment advisors, pension funds, insurance companies, and private banking and capital losses for active investment advisors and hedge funds.
Keywords: equity valuations; expected returns; active to passive investment; climate-induced shifts
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| The transition from active to passive investment management (G11) | equity prices (G12) |
| The transition from active to passive investment management (G11) | price informativeness (G14) |
| Capital flows from active to passive investors (F21) | price informativeness (G14) |
| Climate-induced shifts in asset demand (G19) | equity prices (G12) |
| Climate-induced shifts in asset demand (G19) | wealth distribution (D31) |