PhD Confirmation Seminar - Ruhao (Hadi) Wang

Topic: The Rise of Index Investing: Evidence from ETF Benchmarking Frictions and Central Bank Index Purchases

Abstract: The rapid growth of index investing raises important questions about its implications for asset prices and market functioning. This confirmation seminar presents two studies that examine different aspects of this broader research agenda. The first study, joint with Minsoo, investigates the limits to index benchmarking. We show that even large and liquid index ETFs exhibit persistent deviations from their benchmarks, which can be economically comparable to expense ratios. Using evidence from index ETFs’ use of derivatives, we find important frictions that constrain portfolio replication and affect tracking performance. The second study is an early-stage solo project that exploits the Bank of Japan’s large-scale equity index ETFs purchases in a regression discontinuity design. The project examines how the entry of passive demand affects market frictions and how the cross-section of stock-price responses, with the aim of contributing to the literature on the rise of index investing and its implications for market concentration, volatility, and market efficiency. Time permitting, I will briefly outline a related research direction on the growing role of central banks in financial markets, including joint work with James examining the effects of U.S. monetary policy on global market liquidity.

This seminar will be conducted online via Zoom