Passive Investing, Intermediaries, and Asset Prices

• Applicant: Professor Dr. Holger Kraft
• Subject Area: Accounting and Finance
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 447617473

This research project studies the effect of frictions on the portfolio decisions of mutual funds. A particular focus is on the impact of cash on the portfolio strategies of passive funds. We analyze the optimal strategies in the presence of cash and show how the return distributions of the funds deviate from the return distributions of the corresponding benchmarks. We further explore the equilibrium asset-pricing implications that arise from these deviations. In the second half of the project, we collect and analyze detailed data on the holdings of mutual funds in Germany. We wish to understand the effects of synthetic replication, where funds generate returns via total return swaps rather than directly holding assets. We also empirically analyze the non-index holdings of passive mutual funds (derivatives and non-index assets). Our findings will lead to a better understanding of delegated financial intermediation and its influence on financial markets.

• DFG Programme: Research Units
• Subproject of: FOR 5230: Financial Markets and Frictions - An Intermediary Asset Pricing Approach