I think he's saying that with so much indexing, with the indexes purchasing stocks on a market capitalization basis, the prices of the high market cap stocks are going to go upward the most, others less so. That seems intuitive. This kind of axiomatic increase in prices lowers volatility, which, according to theory, lowers risk. On the other hand, things seem riskier when the prices are driven up, not by fundamentals of the businesses, but by this guaranteed purchasing of the securities. Not that I understand a lot of this. And we'll understand matters much better in 25 years, as one of them points out in the podcast(!)It is intuitive to me that indexing increases volatility. Since that is the opposite of the claim above, maybe the effect on volatility is less than obvious?
My logic is that indexing is equivalent to leveraging all non-indexed trades. That cranks volatility up. Am I wrong?
(Example: Say 50% of the stock is indexed. Selling a share would result in twice the movement than without indexing, since an indexed mirror share was also sold.)
Good it's been pointed out that there's nothing actionable here according to the proponent of this thinking. If that's the case, then we can I suppose relax and leave the discussions to others. OTOH, there will likely be some responses to this podcast and the accompanying ideas by academics and others who've studied the literature these guys understand. So it might be helpful to keep our ears to the ground.
Statistics: Posted by valleyrock — Sun Nov 24, 2024 6:27 am — Replies 4 — Views 592