PhD Research Proposal Presentation: Pouya Behmaram

Mr. Pouya Behmaram a doctoral student at McGill University in the area of Finance will be presenting his research proposal entitled:

Two Essays on Empirical Asset Pricing and Dynamics of Passive Investing

Wednesday, April 10, 2024 at 9:00am – 10:30am

(The presentation will be conducted on zoom)

Student Committee Chair: Professor David Schumacher

Abstract:

This thesis delves into the repercussions of the transition from active to passive investing, examining its multifaceted effects on asset pricing, expected returns, investor demand, and price elasticity. The first essay “From Active to Passive: The Consequences for Demand Elasticity” examines the impact of the shift to passive investing on asset demand and price elasticity within the U.S. equity market. It introduces a new metric for measuring stock-level passive ownership, which is then integrated into the existing demand system. The analysis reveals a significant reduction in the price elasticity of demand across all types of investors, with passive investment pressure predominantly affecting larger-cap stocks. The results indicate that the surge in passive investing accounts for roughly 15% of the increased inelasticity of demand for stocks. Furthermore, the inclusion of this passive ownership metric in the demand model not only diminishes the previously unexplained latent demand but also demonstrates a positive relationship between a stock’s demand and its level of passive ownership.

In the second paper “From Realized to Expected: The Passive Investing Impact”, I use the Indexing Inclusion Ratio (IXI) as a measure of passive ownership to assess its increasing impact on U.S. equity markets. The findings reveal that high-indexed stocks highly out-perform their low-indexed counterparts, primarily due to the influx of passive capital flows rather than fundamental value. By analyzing the expected return both ex-ante through implied costs of capital and ex-post by adjusting for passive flows and earnings anomalies, I show that high-indexed stocks exhibit lower expected returns, indicating a potential correction when the trend toward passive investing reaches equilibrium. Additionally, I show that the recent underperformance of value and small-cap stocks is intrinsically linked to the secular passive shift.