Further analysis of the liquidity and information components of institutional orders: Active versus passive funds

Alex Frino*, David R. Gallagher, Teddy N. Oetomo

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)439-452
Number of pages14
JournalPacific-Basin Finance Journal
Volume14
Issue number5
DOIs
Publication statusPublished - Nov 2006
Externally publishedYes

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