The Economic Impact of Index Investing
Review of Financial Studies, Forthcoming
85 Pages Posted: 26 Sep 2015 Last revised: 27 Aug 2020
Date Written: July 5, 2018
We study the impact of index investing on firm performance by examining the link between commodity indices and firms that use index commodities. Around 2004, there was a dramatic increase in commodity index investing, an event referred to as the financialization of commodity markets. Following financialization, firms that use index commodities make worse production decisions, earn 40% lower profits, and have 6% higher costs. Consistent with a feedback channel in which market participants learn from prices, our results suggest that index investing distorts the price signal thereby generating a negative externality that impedes firms' ability to make production decisions.
Keywords: commodity markets, financialization, index investing, real economic impact
JEL Classification: G12, G14, Q02
Suggested Citation: Suggested Citation