Further analysis of the liquidity and information components of institutional orders: Active versus passive funds

Alex Frino; David R. Gallagher; Teddy N. Oetomo

doi:10.1016/j.pacfin.2006.02.001

Further analysis of the liquidity and information components of institutional orders: Active versus passive funds

Alex Frino^*
, David R. Gallagher
, Teddy N. Oetomo

^*Corresponding author for this work

Research output: Contribution to journal › Article › Research › peer-review

9 Citations (Scopus)

Abstract

Previous research examining the price impact of institutional trading concludes that index funds incur higher liquidity costs due to the higher demand for trading immediacy. However, this conclusion has only been inferred by comparing the total price impact of active and index funds. This study extends the literature by decomposing the price impact of both active and index funds' trades into liquidity (temporary) and information (permanent) components. Index fund trades incur higher liquidity costs and generate lower returns than active funds' trades. Indeed, the evidence presented in this study reveals the execution costs of index funds' trades are entirely liquidity-driven.

Original language	English
Pages (from-to)	439-452
Number of pages	14
Journal	Pacific Basin Finance Journal
Volume	14
Issue number	5
DOIs	https://doi.org/10.1016/j.pacfin.2006.02.001
Publication status	Published - Nov 2006
Externally published	Yes

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title = "Further analysis of the liquidity and information components of institutional orders: Active versus passive funds",

abstract = "Previous research examining the price impact of institutional trading concludes that index funds incur higher liquidity costs due to the higher demand for trading immediacy. However, this conclusion has only been inferred by comparing the total price impact of active and index funds. This study extends the literature by decomposing the price impact of both active and index funds' trades into liquidity (temporary) and information (permanent) components. Index fund trades incur higher liquidity costs and generate lower returns than active funds' trades. Indeed, the evidence presented in this study reveals the execution costs of index funds' trades are entirely liquidity-driven.",

author = "Alex Frino and Gallagher, \{David R.\} and Oetomo, \{Teddy N.\}",

note = "Funding Information: The authors are grateful to the investment managers who supplied institutional trade data used in this paper, and the Securities Industry Research Centre of Asia-Pacific (SIRCA) who provided data. This research was funded by the CRC for Technology Enabled Capital Markets. The authors thank the Editor, Kalok Chan, two anonymous referees, Joel Fabre, Vito Mollica, Andrew Lepone, Luke Bortoli, Andrew Tan, Danika Wright and participants of the Australasian Finance and Banking Conference 2003 for helpful comments, and Justin Bull and Nic McGilvray for programming assistance. ",

year = "2006",

month = nov,

doi = "10.1016/j.pacfin.2006.02.001",

language = "English",

volume = "14",

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journal = "Pacific Basin Finance Journal",

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AU - Frino, Alex

AU - Gallagher, David R.

AU - Oetomo, Teddy N.

N1 - Funding Information: The authors are grateful to the investment managers who supplied institutional trade data used in this paper, and the Securities Industry Research Centre of Asia-Pacific (SIRCA) who provided data. This research was funded by the CRC for Technology Enabled Capital Markets. The authors thank the Editor, Kalok Chan, two anonymous referees, Joel Fabre, Vito Mollica, Andrew Lepone, Luke Bortoli, Andrew Tan, Danika Wright and participants of the Australasian Finance and Banking Conference 2003 for helpful comments, and Justin Bull and Nic McGilvray for programming assistance.

PY - 2006/11

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N2 - Previous research examining the price impact of institutional trading concludes that index funds incur higher liquidity costs due to the higher demand for trading immediacy. However, this conclusion has only been inferred by comparing the total price impact of active and index funds. This study extends the literature by decomposing the price impact of both active and index funds' trades into liquidity (temporary) and information (permanent) components. Index fund trades incur higher liquidity costs and generate lower returns than active funds' trades. Indeed, the evidence presented in this study reveals the execution costs of index funds' trades are entirely liquidity-driven.

AB - Previous research examining the price impact of institutional trading concludes that index funds incur higher liquidity costs due to the higher demand for trading immediacy. However, this conclusion has only been inferred by comparing the total price impact of active and index funds. This study extends the literature by decomposing the price impact of both active and index funds' trades into liquidity (temporary) and information (permanent) components. Index fund trades incur higher liquidity costs and generate lower returns than active funds' trades. Indeed, the evidence presented in this study reveals the execution costs of index funds' trades are entirely liquidity-driven.

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DO - 10.1016/j.pacfin.2006.02.001

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EP - 452

JO - Pacific Basin Finance Journal

JF - Pacific Basin Finance Journal

IS - 5

ER -

Further analysis of the liquidity and information components of institutional orders: Active versus passive funds

Abstract

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