Abstract
The purpose of this article is to explain the ‘passive investor puzzle’. Specifically, we aim to explain why passive investors do not always behave as predicted by the efficient market hypothesis. We suggest that passive investors do not always behave as theoretically predicted, which is to buy (sell) when an asset is undervalued (overvalued), because: (1) passive investors may be able to estimate the fundamental value only within the very wide range; (2) passive investors deliberately participate in rational bubbles; and (3) there might be some tacit collusion between passive investors and rational speculators. On the basis of our analysis, we suggest that traders acting as rational speculators are likely to exploit potential market inefficiencies and profit at the expense of rational arbitragers.
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