PrefBlog

A number of big names from the Fed – Kenechukwu Anadu, Mathias Kruttli, Patrick E. McCabe, Emilio Osambela and Chaehee Shin – have published a working paper titled The Shift From Active to Passive Investing: Potential Risks to Financial Stability?:

The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift on financial stability through four different channels: (1) effects on investment funds’ liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and co-movement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing some types of risk while diminishing others: The shift has probably reduced liquidity transformation risks, although some passive strategies amplify market volatility, and passive-fund growth is increasing asset-management industry concentration. We find mixed evidence that passive investing is contributing to the co-movement of assets. Finally, we use our framework to assess how financial stability risks are likely to evolve if the shift to passive investing continues, noting that some of the repercussions of passive investing ultimately may slow its growth.

The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a summary of the work.

Speaking of the Fed, I learned today that the New York Fed has a webpage titled Measuring the Natural Rate of Interest, which estimates the Natural Rate of Interest in the US as about 0.75% and 0.5% for ‘Advanced Economies’. Canada is estimated at 1.43%.

This entry was posted on Monday, December 3rd, 2018 at 7:41 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.