The Price of Passive Investing: Demand Elasticity in the Swedish Equity Market

Sammanfattning

The growth of passive investing has changed who participates in equity markets and how trading occurs. As capital tracking indexes displace active, price sensitive investors, recent research suggests that demand curves for individual stocks are becoming less elastic. But almost all evidence comes from the United States. This study provides, to our knowledge, the first event study evidence on passive demand shocks in the Swedish equity market, using MSCI Sweden and MSCI Sweden Small Cap index rebalancing events as exogenous demand shocks over 2006 to 2025. Less liquid stocks experience significantly larger price movements for a given rebalancing flow, and for stocks simultaneously crossing between the two indexes, larger buying flows are associated with larger price responses. Both findings are consistent with downward-sloping demand curves. Abnormal rebalancing volume more than doubles from pre- to post-2018, yet the price impact coefficient within the event window reverses sign post 2018. This suggests that traders have adapted by front running these predictable flows, shifting price incorporation outside of the event window. The results suggest that the structural changes from passive ownership growth can be seen outside of the US. This has implications for price formation and demand elasticity, highlighting the importance for further studies in markets where passive investing has grown.