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Wolf in Sheep's Clothing: The Active Investment Strategies behind Index Performance


Ranaldo, Angelo; Haeberle, Rainer (2008). Wolf in Sheep's Clothing: The Active Investment Strategies behind Index Performance. European financial management, 14(1):55-81.

Abstract

This paper argues that the commonly used market indices imply forms of active investment management in disguise. The selection and rebalancing rules make these indices highly exclusive and dynamic regarding their underlying components and significantly bias their performance. Any passive investment tracking these indices turns into an active strategy characterised by market timing and state-dependent performance. Evidence is provided that exclusive indices outperform (underperform) more inclusive peer indices in upward (downward) markets. The constitution and maintenance rules of exclusive indices correspond to a set of active trading and investment rules similar to momentum strategies.

Abstract

This paper argues that the commonly used market indices imply forms of active investment management in disguise. The selection and rebalancing rules make these indices highly exclusive and dynamic regarding their underlying components and significantly bias their performance. Any passive investment tracking these indices turns into an active strategy characterised by market timing and state-dependent performance. Evidence is provided that exclusive indices outperform (underperform) more inclusive peer indices in upward (downward) markets. The constitution and maintenance rules of exclusive indices correspond to a set of active trading and investment rules similar to momentum strategies.

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9 citations in Web of Science®
13 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > General Economics, Econometrics and Finance
Scope:Discipline-based scholarship (basic research)
Language:English
Date:January 2008
Deposited On:28 Aug 2023 12:39
Last Modified:29 Apr 2024 01:39
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:1354-7798
OA Status:Closed
Publisher DOI:https://doi.org/10.1111/j.1468-036X.2007.00363.x
Other Identification Number:merlin-id:5927
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