The impact of active and passive investment on market efficiency: a simulation study

Autor: Patrick Jaquart, Marvin Motz, Lutz Köhler, Christof Weinhardt
Jazyk: angličtina
Rok vydání: 2023
Předmět:
Zdroj: Journal of Applied Economics, Vol 26, Iss 1 (2023)
Druh dokumentu: article
ISSN: 15140326
1667-6726
1514-0326
DOI: 10.1080/15140326.2023.2188634
Popis: ABSTRACTWe create a simulated financial market and examine the effect of different levels of active and passive investment on fundamental market efficiency. In our simulated market, active, passive, and random investors interact with each other through issuing orders. Active and passive investors select their portfolio weights by optimizing Markowitz-based utility functions. We find that higher fractions of active investment within a market lead to an increased fundamental market efficiency. The marginal increase in fundamental market efficiency per additional active investor is lower in markets with higher levels of active investment. Furthermore, we find that a large fraction of passive investors within a market may facilitate technical price bubbles, resulting in market failure. By examining the effect of specific parameters on market outcomes, we find that that lower transaction costs, lower individual forecasting errors of active investors, and less restrictive portfolio constraints tend to increase fundamental market efficiency in the market.
Databáze: Directory of Open Access Journals
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