How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing

Paper: SSRN 3821263

Abstract

The conventional wisdom in finance is that competition is fierce among investors: if a group changes its behavior, others adjust their strategies such that noth

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs a semi-structural economic model with equilibrium conditions, endogenous elasticities, and formal estimation challenges (reflection problem, endogeneity), requiring advanced mathematics. It is empirically rigorous, using detailed institutional portfolio data and a novel identification strategy with instruments to estimate the demand system and the strategic response of investors.

Research Flowchart

  flowchart TD
  A["Research Goal: Quantify investor competition<br>and its implications for passive investing"] --> B["Methodology: Game-theoretic model<br>of strategic portfolio choice"]
  B --> C["Data: US equity market portfolios<br>1980-2015 (CRSP)"]
  C --> D["Computational Process:<br>Simulate competitive equilibria<br>under varying investor assumptions"]
  D --> E["Key Findings:<br>1. Competition is strong but incomplete<br>2. Passive investing reduces competition<br>3. Market efficiency varies with investor structure"]