Meet Paul Huebner: Understanding the Competitiveness of Stock Markets

Paul Huebner's research explores the decision-making behind investors' financial portfolio choices and their impact on asset prices and the broader economy. The methods he uses can be applied to answer counterfactual questions, or the "what ifs" that can inform regulatory and policy decisions.

 

In the study titled "How competitive is the stock market?", Huebner and co-authors introduce a new way to quantify how investors compete with each other in the stock market.

 

It is often believed that markets are extremely competitive, meaning if one investor changes their strategy, others will adjust in a way that keeps the market stable. However, the study’s findings suggest that the market is not as perfectly competitive as once thought.

 

The study also looks at the big increase in passive investing—where investors put their money into funds that track the overall market instead of picking specific stocks—over the last 20 to 30 years to understand whether there have been negative externalities to this large shift in financial markets. It found that the rise of passive investing has made the demand for stocks less responsive to price changes, indicating that stock markets are far from the competitive ideal.

 

In another paper, "The making of momentum," Huebner studies how the dynamic trading of investors creates movement in stock prices over time, and most notably, momentum, which is one of the most widely studied anomalies in equity markets.

 

He introduces a new concept, that of a term structure of demand elasticities, whereby he compares how investors trade in response to recent versus longer-term price changes, has also many interesting applications beyond stock returns. For example, it can be used to understand the evolution of "fire sales", which is when stocks are sold off quickly, often at a loss.

 

"It fits within a broader public debate on whether too much passive investing has negative consequences for financial markets, and whether there is a need for regulators to act," Huebner says.

 

"Our quantitative estimates suggest that while competition in financial markets does not entirely undo negative externalities from the rise of passive investing, it does weaken them by about two-thirds, thereby weakening the call for regulatory action."