The Impact of Passive Investments: Index Effect on OSEBX

Joakim Sejersted Bødtker & Harald Skjelbred-Knudsen

Student thesis: Master thesis


One of the defining features of modern finance is the widespread popularity of passive funds. This has sparked a surge in academia for studying whether there are hidden downsides of these otherwise praised investment alternatives. An influential perspective in this debate, is the study of index effects. The dominant view has been that the increasing relevance of index funds are starting to generate new stock market phenomena, not explained by neoclassical theory: stocks that are added (deleted) to the index increase (decrease) their price and systematic risk. The consequences of these new phenomena argue that a “dark side” of passive investing exist, because it implies that passive funds create anomalies and invest in stocks that are overpriced. This thesis is an attempt to investigate whether the index effect exists, study what causes it, and define its consequences in relation to neoclassical theory. The method of choice is an event study inspired by Schleifer (1986) and Vijh (1994), but additional analyses inspired by more modern and sophisticated techniques are also applied. Particularly important, is that this thesis dedicates attention to statistical problems and especially selection bias, not previously seen on similar studies on the Oslo Stock Exchange. The findings suggest that there is an index effect on returns, however, there is much uncertainty to whether this effect is temporary or permanent. It istherefore evidence of the so-called Price Pressure Hypothesis, as well asthe Imperfect Substitutes Hypothesis. Moreover, the evidence of an index effect on comovement is ambiguous, at best. There are some indications of demand-based changes in return comovement, however, there is also support for the neoclassical fundamental view. In the end, it is uncertain whether there is a dark side of passive investments, indicating that the previous consensus of an index effect may have been premature.

EducationsOther, (Graduate Programme) Final Thesis
Publication date2021
Number of pages145
SupervisorsLisbeth la Cour