Costly index investing in foreign markets

Abstract We study trading behavior and performance of foreign investors by level of active management. Using a comprehensive Colombian dataset with complete transaction records, we find that aggregate underperformance of foreign investors is attributable to passively-managed foreign funds. These funds pay higher prices to increase the speed of their trades in order to accommodate daily flows proportionally to their benchmark index. Higher transaction costs occur on days when they trade multiple stocks in the same direction and make large trades near market closing. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity.

• Publication year

  2018

• Venue

  Journal of Financial Markets

• Publication date

  2018-05-30

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.1016/j.finmar.2019.100509
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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