‘Magical’ Efficient-Market Theory Rebuked in Era of Passive Investing
- Investors overall are responding less to prices, paper says
- That’s making stocks more volatile and perhaps less efficient
Thanks to this lethargic trading behavior and the relentless boom in benchmark-tracking index funds, the impact of each trade on prices gets amplified.
Photographer: Julio Cesar Aguilar/AFP/Getty ImagesThis article is for subscribers only.
At first blush, stock trading this week is hardly a paragon of the market-efficiency theory, an oft-romanticized idea in Economics 101. After all, big equity gauges plunged on Monday, spurred by fears of an AI model released a week earlier, before swiftly rebounding.
A fresh academic paper suggests the rise of passive investing may be fueling these kind of fragile market moves.