Market Value Implications of Increasing Passive Investing

Abstract

This study examines if recent years’ popularity and large inflow of money to passive index funds have led to inflated prices in the Swedish equity market. The problem was investigated by studying the net fund flows to passive funds and comparing them to active funds over time to measure to what extent they affect the market price-to-earnings ratio. To accomplish this, the study uses a linear regression analysis. The final dataset which was examined consisted of historical data on the OMXSPI index and Swedish passive and active mutual funds. The results from the main model were ambiguous and do not support the statement that the growth in passive investment funds influences the overall valuation of the equity market. Due to the regression model not showing a statistically significant relationship, the claim of the so-called passive investment bubble is not likely to exist in the Swedish equity market.