Seminar 217, Risk Management: Is Index Concentration an Inevitable Consequence of Market-Capitalization Weighting?
Seminar: Risk Management | November 1 | 11 a.m.-12:30 p.m. | Evans Hall, 648 or zoom
Lisa Goldberg, CDAR & Aperio by BlackRock; Harrison Selwitz, Aperio by BlackRock
Consortium for Data Analytics in Risk
Market-cap-weighted equity indexes are ubiquitous. However, there are growing concerns that such indexes are increasingly concentrated in a few stocks. We ask: Does market-cap weighting inevitably lead to increased concentration over time? The question of inevitability arises from research that suggests the possibility of dominance by a few firms over time via a variety of plausible causal mechanisms. We study concentration in major equity market indexes over time and show that, despite recent concerns, concentration is not yet at levels that may be problematic, and for some indexes was higher in the past. Monte Carlo simulations calibrated to market data provide insight into various approaches to slow concentration, albeit at the expense of higher turnover.
Wouter Leenders, leenders@berkeley.edu, 510-