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Do you mean that financial shocks propagate because a leveraged investor may have to sell assets in market A to fund margin calls in the primary impacted market
by rmrfstar 6y ago
Do you mean that financial shocks propagate because a leveraged investor may have to sell assets in market A to fund margin calls in the primary impacted market B, or that economic shocks propagate because supply chains are deep and brittle?
- smallnamespace 6y agoBoth happened in 2008
- wefarrell 6y agoFinancial shocks driven by passive index funds that hold pre-defined percentages of different asset types. Let's say you have a diversified passive fund that holds 25% each of asset types A, B, C and D. If asset type A crashes and it's now 10% then B, C, and D will now be 30%. The fund will rebalance and sell B/C/D so they're back to 25% and the values of those asset types will decline. The values of A/B/C/D all correlate with one another even if they are fundamentally unrelated.
- centimeter 6y agoMost passive funds are cap weighted so this is not an issue.