The Relevance of Index Funds for Pension Investment in Equities
The rise of index funds over the past 25 years has been a remarkable phenomenon. The traditional rationale for the success of index funds is market efficiency, net of transaction costs. The authors also focus on the role of agency conflicts between...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/11/729385/relevance-index-funds-pension-investment-equities http://hdl.handle.net/10986/19773 |
| Summary: | The rise of index funds over the past 25
years has been a remarkable phenomenon. The traditional
rationale for the success of index funds is market
efficiency, net of transaction costs. The authors also focus
on the role of agency conflicts between fund managers and
investors, which are hard to resolve, given the low power of
statistical tests of performance. Most of the empirical
evidence about the superiority of index funds comes from the
United States. The authors discuss issues associated with
the application of index funds in developing countries, as
well as policy issues in the financial sector that affect
the enabling market infrastructure for index funds. They
also apply these ideas to thinking about the relevance of
index funds for pension investment. The equity premium
provides powerful motivation for equity investment by
pension funds. Index funds make it possible to sidestep the
complexities of forming contracts and monitoring
institutions to govern fund managers. In developing
countries that seek to use index funds in pension
investment, there are avenues through which policymakers can
make index funds more viable. In many countries there are
significant avenues for improving construction of the market
index as well as market mechanisms used in the equity market. |
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