"Index Funds and Stock Market Growth".Goetzmann William Massa Massa, in the Bible Massa (măs`ə), in the Bible, seventh son of Ishmael. Massa, city, Italy Massa (mäs`ä), city (1991 pop. 66,737), capital of Massa-Carrara prov. Massimo The National Bureau of Economic Research The National Bureau of Economic Research (NBER) is a "private, nonprofit, nonpartisan research organization" dedicated to studying the science and empirics of economics, especially the American economy. , Working Paper #7033, August 1999. This research article examines the relationship between stock market activity and investor demands. Using high-frequency data on index fund trading, coupled with a separate analysis of inflows and outflows, this article suggest that investor demand influences stock returns, with causality causality, in philosophy, the relationship between cause and effect. A distinction is often made between a cause that produces something new (e.g., a moth from a caterpillar) and one that produces a change in an existing substance (e.g. moving in the opposite direction only when market conditions decline. The use of high-frequency (daily) data interjects a new dimension to previous work in the mutual fund industry. Past studies have relied on low-frequency (quarterly) trading data and tend to support the idea that investors chase market performance and have little aversion to risk. In contrast, this research article finds that investor behavior is primarily governed by risk aversion risk aversion The tendency of investors to avoid risky investments. Thus, if two investments offer the same expected yield but have different risk characteristics, investors will choose the one with the lowest variability in returns. , rather than by investors chasing positive returns. Since these findings are opposed to previous research, the article raises the question of whether or not these finding can be attributed to some inherent difference between investors in index funds and other mutual funds, or wh ether ether, in chemistry ether, any of a number of organic compounds whose molecules contain two hydrocarbon groups joined by single bonds to an oxygen atom. the greater precision from using high-frequency data has identified behavior not apparent when using the low-frequency data available to this point. |
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