{"status":"ok","message-type":"work","message-version":"1.0.0","message":{"indexed":{"date-parts":[[2026,10,23]],"date-time":"2026-10-23T16:26:43Z","timestamp":1792772803420,"version":"4.5.0"},"posted":{"date-parts":[[2026]]},"group-title":"SSRN","reference-count":41,"publisher":"Elsevier BV","license":[{"start":{"date-parts":[[2026,1,1]],"date-time":"2026-01-01T00:00:00Z","timestamp":1767225600000},"content-version":"unspecified","delay-in-days":0,"URL":"https:\/\/www.uspto.gov\/ip-policy\/copyright-policy\/copyright-basics"}],"content-domain":{"domain":[],"crossmark-restriction":false},"short-container-title":[],"abstract":"<jats:p>This paper examines whether the rise of passive investing affects the equity market's capacity to distribute aggregate risk. Using a valuation-adjusted Bartik instrument, I establish that a one-standard-deviation increase in passive ownership raises average pairwise stock return correlations by 9 percentage points. Through a structural demand-system framework, I decompose portfolio risk into correlation and idiosyncraticvolatility components and uncover two opposing forces: passive investing synchronizes asset returns through common, price-insensitive demand shocks, while simultaneously dampening firm-specific volatility. The correlation effect dominates. Relative to a counterfactual economy without passive investors, diversification benefits in the global minimum variance portfolio are 3% lower and its minimum achievable volatility is 19% higher; for the risk parity portfolio the losses are larger, at 9.5% and 25% respectively. Welfare costs concentrate among large, well-diversified institutions and are amplified during recessions-precisely when effective diversification matters most.<\/jats:p>","DOI":"10.2139\/ssrn.6487578","type":"posted-content","created":{"date-parts":[[2026,7,29]],"date-time":"2026-07-29T13:16:05Z","timestamp":1785330965000},"source":"Crossref","is-referenced-by-count":0,"title":["Passive Investing, Diversification Risk and Financial Stability"],"prefix":"10.2139","author":[{"given":"Ivan","family":"Gufler","sequence":"first","affiliation":[],"role":[{"vocabulary":"crossref","role":"author"}]}],"member":"78","reference":[{"key":"ref1","doi-asserted-by":"crossref","first-page":"2","DOI":"10.1093\/rfs\/hhw088","article-title":"Measuring systemic risk","volume":"30","author":"V V Acharya","year":"2017","journal-title":"The Review of Financial Studies"},{"key":"ref2","first-page":"1705","volume":"106","author":"Adrian","year":"2016","journal-title":"CoVaR"},{"key":"ref3","doi-asserted-by":"crossref","first-page":"1","DOI":"10.1086\/262109","article-title":"Financial contagion","volume":"108","author":"F Allen","year":"2000","journal-title":"Journal of Political Economy"},{"key":"ref4","doi-asserted-by":"crossref","first-page":"75","DOI":"10.2469\/faj.v68.n6.7","article-title":"Will my risk parity strategy outperform?","volume":"68","author":"R M Anderson","year":"2012","journal-title":"Financial Analysts Journal"},{"key":"ref5","doi-asserted-by":"crossref","first-page":"1099","DOI":"10.1111\/jofi.12149","article-title":"Connected stocks","volume":"69","author":"Anton","year":"2014","journal-title":"The Journal of Finance"},{"key":"ref6","doi-asserted-by":"crossref","first-page":"111","DOI":"10.1016\/j.jfineco.2016.03.003","article-title":"Passive investors, not passive owners","volume":"121","author":"I R Appel","year":"2016","journal-title":"Journal of Financial Economics"},{"key":"ref7","doi-asserted-by":"crossref","first-page":"47","DOI":"10.2469\/faj.v68.n1.1","article-title":"Leverage aversion and risk parity","volume":"68","author":"C S Asness","year":"2012","journal-title":"Financial Analysts Journal"},{"key":"ref8","author":"B Becker","year":"2026","journal-title":"The Global Rise of Index-Based Ownership of Firms"},{"key":"ref9","doi-asserted-by":"crossref","first-page":"2591","DOI":"10.1111\/j.1540-6261.2009.01512.x","article-title":"International stock return comovements","volume":"64","author":"G Bekaert","year":"2009","journal-title":"The Journal of Finance"},{"key":"ref10","doi-asserted-by":"crossref","first-page":"2471","DOI":"10.1111\/jofi.12727","article-title":"Do ETFs increase volatility?","volume":"73","author":"I Ben-David","year":"2018","journal-title":"The Journal of Finance"},{"key":"ref11","author":"A Bhattacharya","year":"2020","journal-title":"Etfs and systemic risks"},{"key":"ref12","doi-asserted-by":"crossref","first-page":"150","DOI":"10.1016\/j.jbankfin.2016.12.002","article-title":"Which market integration measure?","volume":"76","author":"M Billio","year":"2017","journal-title":"Journal of Banking & Finance"},{"key":"ref13","doi-asserted-by":"crossref","first-page":"3175","DOI":"10.1093\/rfs\/hhab106","article-title":"The equilibrium consequences of indexing","volume":"35","author":"P Bond","year":"2022","journal-title":"The Review of Financial Studies"},{"key":"ref14","doi-asserted-by":"crossref","first-page":"48","DOI":"10.1093\/rfs\/hhw060","article-title":"SRISK: A conditional capital shortfall measure of systemic risk","volume":"30","author":"C Brownlees","year":"2017","journal-title":"The Review of Financial Studies"},{"key":"ref15","doi-asserted-by":"crossref","first-page":"2201","DOI":"10.1093\/rfs\/hhn098","article-title":"Market liquidity and funding liquidity","volume":"22","author":"M K Brunnermeier","year":"2009","journal-title":"The review of financial studies"},{"key":"ref16","doi-asserted-by":"crossref","first-page":"707","DOI":"10.1086\/524204","article-title":"Down or out: Assessing the welfare costs of household investment mistakes","volume":"115","author":"L E Calvet","year":"2007","journal-title":"Journal of Political Economy"},{"key":"ref17","doi-asserted-by":"crossref","first-page":"1","DOI":"10.1111\/0022-1082.00318","article-title":"Have individual stocks become more volatile? 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