How financial markets actually work.
Over half of equity fund assets are now in passive funds. Central banks hold 40% of GDP in bonds. Leveraged intermediaries amplify every crisis. The main forces setting prices are institutional — and we're only starting to understand them.
Most of finance starts with a representative investor or a frictionless market. Market macrostructure starts with reality: who actually holds the assets, what rules and constraints they face, and how that shapes prices. Three questions organize the field.
Who actually holds the assets? Pension funds, index funds, insurance companies, central banks, hedge funds — each with different size, goals, and constraints.
How do they actually invest? Index funds track benchmarks mechanically. Insurance companies match liabilities. Central banks follow policy rules. These mandates and constraints drive their demand.
What does it do to prices? When the mix of holders shifts — more passive, more leveraged, more central bank — risk premia, volatility, and market efficiency all change.
“Prefer being approximately right rather than rigorously wrong.”
Start with what investors actually do, build models around that, and make contact with the key forces in the data.
E[R] = f(Risk, Preferences)
Prices reflect risk and a representative investor's preferences. Institutions are a veil — money flows through them but they don't matter for prices on their own.
E[R] = f(Risk, Preferences, Institutions)
Real institutions have mandates, constraints, and frictions that shape their demand — and move prices in ways that fundamentals alone can't explain.
Other investors don't perfectly undo what institutions do — because of trading costs, inertia, limited expertise, or just not paying attention.
Institutions' demand changes — from crises, regulation, policy shifts, or structural trends like the rise of passive investing.
Macrostructure affects asset prices
The research agenda covers many forces. Here are three — each large, measurable, and already reshaping how markets work.
When intermediaries lose money, they pull back from risk — and prices fall further because fewer players are left to absorb it. This amplification loop shows up across stocks, bonds, and currencies, and it persists long after the initial shock.
Passive funds hold the market portfolio regardless of prices — they don't respond to mispricing. That concentrates all of the price discovery on the shrinking pool of active investors, making markets more inelastic.
When central banks buy assets through QE, they remove supply from private markets, compressing yields and risk premia. QE announcements moved Treasury yields 100–150 basis points. The trading rule itself matters: investors anticipate state-contingent purchases, so yields fall even before the Fed buys.
These are three examples — the same logic applies wherever large institutions shape prices: insurance companies and the yield curve, pension funds and LDI, sovereign wealth funds and FX, ESG mandates and stock prices. The reading list and paper cover many more.
A starting point: look at who holds what. These charts show six decades of shifts in U.S. asset ownership, from the Fed's Z.1 Financial Accounts. Direct household equity holdings fell from 86% to 40% since 1960, replaced by funds and intermediaries. The Fed went from ~10% of Treasuries to 24%, and from 2% of Agency/MBS to 30%. Insurance companies' corporate bond share fell from 45% to 15%, replaced by mutual funds. Households hold almost nothing directly in fixed income.
How to actually do this research. Three approaches that work — and the best papers combine them.
Exploit shocks to institutional demand — index additions, regulatory changes, QE announcements — to identify causal effects on prices.
Build models with investor heterogeneity, frictions, and dynamics to understand mechanisms and run policy counterfactuals.
Use holdings data to estimate demand systems across investor types. Lets you run quantitative counterfactuals — what happens to prices if passive doubles?
The data and tools exist. Pick a market and start.
Where the field needs new work. Each of these is wide open.
When do macrostructure effects represent inefficiencies versus rational risk sharing? Are passive-driven price distortions welfare-reducing, or do they reflect efficient delegation?
How do players and frictions evolve endogenously? Long-run trends (passive growth) versus crisis dynamics (intermediary amplification) — can we build models that capture both?
Different institutions, different frictions. How does macrostructure differ in emerging markets? What role do sovereign wealth funds, state banks, and capital controls play?
How should regulation account for macrostructure? What are optimal central bank purchase strategies? How do leverage rules reshape who bears risk?
Shifts in demand for ESG assets affect prices and firm investment. How large are these effects? Do they achieve their intended goals?
Exchange rate determination through the lens of institutional demand. How do FX interventions, carry trades, and global intermediary networks shape currency markets?
The papers that define the field, organized by topic. Start with the survey, then follow what interests you.
The survey that defines the macrostructure agenda — framework, evidence, and open questions in one place.
Annual Review of Financial Economics, 2025
forthcoming, Journal of Economic Literature
How leveraged intermediaries — banks, broker-dealers, hedge funds — amplify shocks and drive risk premia across asset classes.
Journal of Finance, 1997
Journal of Finance, 2010
American Economic Review, 2013
Journal of Finance, 2014
Journal of Finance, 2021
Journal of Financial Economics, 2017
American Economic Review, 2014
Quarterly Journal of Economics, 2017
Review of Financial Studies, 2022
The rise of index funds changes who responds to prices — and what happens to the prices themselves.
Journal of Political Economy, 2024
Review of Financial Studies, 2023
Journal of Financial Economics, 2024
Journal of Financial Economics, 2022
Journal of Finance, 2024
When central banks buy assets, they reshape supply, compress yields, and change how investors bear risk.
Brookings Papers on Economic Activity, 2011
Journal of Political Economy, 2012
Econometrica, 2021
Review of Financial Studies, 2014
American Economic Review, 2024
Working Paper, 2025
Journal of Financial Economics, 2015
Working Paper, 2025
Estimate what each type of investor actually does — their demand functions — and use that to run counterfactuals.
Journal of Political Economy, 2019
Review of Economic Studies, 2024
American Economic Review: Insights, 2023
Review of Financial Studies, 2009
The same institutional logic at work in credit markets, FX, government debt, and across borders.
Journal of Finance, 2018
Journal of Finance, 2015
Review of Financial Studies, 2013
Review of Financial Studies, 2018
Journal of Political Economy, 2020
Working Paper, 2018
Journal of Financial Economics, 2007
A presentation covering the full macrostructure agenda.
Framework, three applications (intermediaries, passive investing, central banks), methodology, and open questions.
Companion site for “Market Macrostructure: Institutions and Asset Prices,” published in the Annual Review of Financial Economics (2025).