If Everyone Is an Indexer, Who Sets Prices? Combining Valuation-Driven and Capital-Driven Asset Demand

• Activity Number: 176
• Type: Contributed
• Date/Time: Monday, August 10, 2015 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Serge Sverdlov*
• Keywords: efficient markets hypothesis ; indexing ; phase transition ; bubble ; macro demand ; capital assets

Abstract

A classical objection to the efficient markets hypothesis is "if it's optimal for everyone to index, who will set prices?" We introduce a macro-demand model with endogenous valuation driven speculative demand and exogenous valuation insensitive capital flows. We address the computation of price, capital, and valuation elasticities of individual assets. Key statistical and computational issues are identifiability and essential nonlinearity with phase transitions. We illustrate the phase transition phenomena within the macro-demand model. Model and estimator behavior is different in the capital constrained (frozen/solid) phase, the valuation driven (liquid) phase, and the abundant capital, outlier valuation driven (gas/bubble) phase; moreover, the under- and the over-capitalized phases differ from the liquid phase asymmetrically.