Scientific Publication

Costly Index Investing in Foreign Markets

author(s) Pedraza, A. - Pulga, F. - Vasquez, J.
from UK Foreign, Commonwealth & Development Office (FCDO)
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themes
regions
  • South America
  • Latin America and the Caribbean
  • Americas
  • World
citation

Pedraza, Alvaro, Fredy Pulga, and Jose Vasquez. (2019), “Costly Index Investing in Foreign Markets, Journal of Financial Markets, https://doi.org/10.1016/j.finmar.2019.100509

Publications and datasets provided via GARDIAN

Abstract

We study trading behavior and performance of foreign investors by level of active management. Using a comprehensive Colombian dataset with complete transaction records, we find that aggregate underperformance of foreign investors is attributable to passively-managed foreign funds. These funds pay higher prices to increase the speed of their trades in order to accommodate daily flows proportionally to their benchmark index. Higher transaction costs occur on days when they trade multiple stocks in the same direction and make large trades near market closing. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity. This is an output of the World Bank’s Strategic Research Program

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