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Passive Efficiency - Exploring Stocks' Return, Risk, & Efficiency Through Index Investing in Europe

Sjöberg, Filip LU and Lexander, Markus LU (2024) NEKN02 20241
Department of Economics
Abstract
This study investigates the consequences of stocks being included in an index, in terms of
returns, risk, and pricing efficiency. We examine the European stock market, utilizing the broad
STOXX Europe 600 index, which, to a large extent, has been overseen by previous research.
Over the recent period 2013-2023, we document all additions to the index and collect fund
ownership data, classified as index (passive) and active, on all stocks before and after the index
inclusion. Employing a two-way fixed effect panel regression, we examine potential effects in
relation to fund ownership. The study suggests that active fund ownership is significantly
related to positive stock returns, as seen by both the arithmetic and geometric mean... (More)
This study investigates the consequences of stocks being included in an index, in terms of
returns, risk, and pricing efficiency. We examine the European stock market, utilizing the broad
STOXX Europe 600 index, which, to a large extent, has been overseen by previous research.
Over the recent period 2013-2023, we document all additions to the index and collect fund
ownership data, classified as index (passive) and active, on all stocks before and after the index
inclusion. Employing a two-way fixed effect panel regression, we examine potential effects in
relation to fund ownership. The study suggests that active fund ownership is significantly
related to positive stock returns, as seen by both the arithmetic and geometric mean return.
Concerning stocks' risk, measured by volatility and beta, we find a significant positive
connection to index fund ownership. Regarding pricing efficiency, tested through the variance
ratio test, we observe insignificant results, consistent with previous research. In essence, our
findings suggest that inclusion in an index does not harm the efficiency of the pricing
mechanism. However, a potential side effect is an increase in idiosyncratic risk as index
ownership rises. (Less)
Please use this url to cite or link to this publication:
author
Sjöberg, Filip LU and Lexander, Markus LU
supervisor
organization
course
NEKN02 20241
year
type
H1 - Master's Degree (One Year)
subject
keywords
European stock market, index investing, fund ownership, pricing efficiency, fixed effect panel regression
language
English
id
9168025
date added to LUP
2024-08-12 15:56:23
date last changed
2024-08-12 15:56:23
@misc{9168025,
  abstract     = {{This study investigates the consequences of stocks being included in an index, in terms of
returns, risk, and pricing efficiency. We examine the European stock market, utilizing the broad
STOXX Europe 600 index, which, to a large extent, has been overseen by previous research.
Over the recent period 2013-2023, we document all additions to the index and collect fund
ownership data, classified as index (passive) and active, on all stocks before and after the index
inclusion. Employing a two-way fixed effect panel regression, we examine potential effects in
relation to fund ownership. The study suggests that active fund ownership is significantly
related to positive stock returns, as seen by both the arithmetic and geometric mean return.
Concerning stocks' risk, measured by volatility and beta, we find a significant positive
connection to index fund ownership. Regarding pricing efficiency, tested through the variance
ratio test, we observe insignificant results, consistent with previous research. In essence, our
findings suggest that inclusion in an index does not harm the efficiency of the pricing
mechanism. However, a potential side effect is an increase in idiosyncratic risk as index
ownership rises.}},
  author       = {{Sjöberg, Filip and Lexander, Markus}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Passive Efficiency - Exploring Stocks' Return, Risk, & Efficiency Through Index Investing in Europe}},
  year         = {{2024}},
}