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Slashdot: 'Magical' Efficient-Market Theory Rebuked in Era of Passive Investing

'Magical' Efficient-Market Theory Rebuked in Era of Passive Investing
Published on February 01, 2025 at 12:10AM
An anonymous reader shares a report: At first blush, stock trading this week is hardly a paragon of the market-efficiency theory, an oft-romanticized idea in Economics 101. After all, big equity gauges plunged on Monday, spurred by fears of an AI model released a week earlier, before swiftly rebounding. A fresh academic paper suggests the rise of passive investing may be fueling these kind of fragile market moves. According to a study to be published in the prestigious American Economic Review, evidence is building that active managers are slow to scoop up stocks en masse when prices move away from their intrinsic worth. Thanks to this lethargic trading behavior and the relentless boom in benchmark-tracking index funds, the impact of each trade on prices gets amplified, explaining how sell orders, like on Monday perhaps, can induce broader equity gyrations.ÂAs a result, the financial landscape is proving less dynamic and more volatile in the era of Big Passive, according to authors at the UCLA Anderson School of Management, the Stockholm School of Economics and the University of Minnesota Carlson School of Management.

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