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Abstract
The authors analyze the development of various risk commonalities in Europe and the United States, as well as in emerging markets, and find a substantial increase in the co-movements in trading patterns, price returns, and liquidity risk within equity markets. They test the hypothesis that index-linked investing is a major driver for the increase in risk commonality. By aggregating the data in a cross-regional perspective, the authors capitalize on the different levels of indexation in the markets and find statistically significant and economically relevant evidence that the growth in index-linked investing is related to the increased co-movement within equity markets. The results suggest a significant increase in market fragility around the globe, leading to an increased danger of more severe reactions to unanticipated events going forward. Portfolio managers are well-advised to account for the increased proportion of index-linked investing within their risk management tools, diversification approaches, and active management strategies.
TOPICS: Emerging, in markets, manager selection
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