We theoretically analyze how index investing affects financial markets using a dynamic exchange economy with heterogeneous investors and two Lucas trees. We identify two effects of indexing: lockstep trading of stocks increases market volatility and stock return correlations but reduction in...

This paper studies the optimal consumption and portfolio problem of an investor with recursive preferences who is subject to time-varying margin requirements. The level of the requirements at each moment is determined by contemporaneous volatility of returns, which is stochastic and may have...

We propose new approaches to constructing mimicking portfolios for non-tradable shocks from a large set of base assets. The key element of our procedure is the imposition of regularization constraints on portfolio strategies that help mitigate the overfitting problem caused by a large number of...