Further analysis of the liquidity and information components of institutional orders: Active versus passive funds |
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| Institution: | 1. College of Business, Hankuk University of Foreign Studies, 107 Imun-dong, Dongdaemun-Gu, Seoul 130-791, Republic of Korea;2. School of Accounting, College of Business Administration, Florida International University, 11200 SW 8th Street, Miami, FL 33199, USA;3. College of Business Administration, Seoul National University 1 Gwanak-ro, Gwanak-gu, Seoul 151-916, Republic of Korea;1. School of Economics and Commerce, South China University of Technology, Guangzhou, China;2. School of Economics, Shenzhen Polytechnic, Shenzhen, China;3. School of Business, University of New South Wales, Canberra, ACT 2600, Australia;1. Department of Epidemiology and Biostatistics, Michigan State University, East Lansing, MI 48824,USA;2. School of Economics, Xiamen University, Fujian 361005, China;1. UQ Business School, Colin Clark Building, Blair Drive, University of Queensland, St Lucia, Queensland 4072, Australia;2. Standard Chartered Bank, 8 Marina Boulevard, Marina Bay Financial Centre Tower 1, 018981, Singapore |
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| Abstract: | Previous research examining the price impact of institutional trading concludes that index funds incur higher liquidity costs due to the higher demand for trading immediacy. However, this conclusion has only been inferred by comparing the total price impact of active and index funds. This study extends the literature by decomposing the price impact of both active and index funds' trades into liquidity (temporary) and information (permanent) components. Index fund trades incur higher liquidity costs and generate lower returns than active funds' trades. Indeed, the evidence presented in this study reveals the execution costs of index funds' trades are entirely liquidity-driven. |
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