PhD Thesis Defense Presentation: Pouya Behmaram

Mr. Pouya Behmaram, a doctoral student at McGill University in the Finance area will be presenting his thesis defense entitled:

Two Essays on Empirical Asset Pricing and Dynamics of Passive Investing

Thursday, July 25, 2024 at 9:00 a.m.
(The defense will be conducted on Zoom)

Student Committee Chair: Professor David Schmaucher

Please note that the presentation will be conducted on Zoom. If you wish to attend the presentation, kindly contact the PhD Office.

ABSTRACT

This thesis explores the consequences of the shift from active to passive investing, analyzing its diverse impacts on asset pricing, expected returns, investor demand, and price elasticity. The first essay, titled “From Active to Passive: The Consequences for Demand Elasticity,” investigates how the transition to passive investing influences asset demand and price elasticity in the U.S. equity market. It presents a new metric for assessing stock-level passive ownership, which is then incorporated into the existing demand framework. The findings reveal a notable decrease in the price elasticity of demand among all investor types, with passive investment pressure mainly affecting larger-cap stocks. The results suggest that the rise in passive investing accounts for approximately 15% of the increased inelasticity of demand for stocks. Additionally, incorporating this passive ownership metric into the demand system not only reduces the previously unexplained latent demand but also shows a positive correlation between a stock’s demand and its level of passive ownership.

In my second paper, “From Realized to Expected: The Passive Investing Impact,” I employ Indexing Inclusion Ratio (IXI) to gauge the growing influence of passive ownership on the US equity realized and expected returns. The results indicate that stocks with high indexing significantly outperform those with low indexing, mainly due to the influx of passive capital rather than intrinsic value. By examining the expected return both ex-ante via implied capital costs and ex-post by accounting for passive flows and earnings anomalies, I demonstrate that high-indexed stocks have lower expected returns, suggesting a potential correction as passive investing trends stabilize. Furthermore, I illustrate that the recent underperformance of value and small-cap stocks is closely related to the ongoing shift toward passive investing.