Passive Investing

Closing Auction, Passive Investing, and Stock Prices (Job Market Paper)

**Abstract**: Over the last decade, the volume of market-on-close orders has increased to more than 10% of the entire day's trading volume. This paper investigates this rise and documents four stylized facts: (i) passive investing leads to greater usage of market-onclose orders, consistent with passive fund’s motivation for minimizing tracking error; (ii) the price impact from large market-on-close order imbalances is economically large and transitory, leading to short-term price reversal; (iii) a long/short trading strategy exploiting this reversal results in a significant risk-adjusted return of 13.2 basis points per day, consistent with the hypothesis that investors are compensated by providing liquidity to passive funds; and (iv) informed traders also use market-on-close orders, consistent with Admati and Pfleiderer’s (1988) prediction that liquidity trades attract informed trades.Overall, the set of findings demonstrates market-on-close order as an important trading channel through which passive investing affects underlying stocks.

The Effect of Passive Investing on Initial Public Offering Stocks: Evidence from Russell Quarterly IPO Additions

**Abstract**: This study investigates the impact of passive investing on initial public offering firms by examining the Russell quarterly IPO additions. The findings show that stocks more likely to be included in the next quarterly additions experience bigger first-day returns, consistent with the hypothesis that underwriters do not fully incorporate the effect of potential inclusion in Russell indices on stock prices when they set the IPO price. During quarterly addition periods, included IPOs experience significant abnormal returns that are subsequently reversed, consistent with the price pressure hypothesis.