[!todo] Seed note. A starting point, not a finished note yet.
Gabaix and Koijen’s inelastic markets hypothesis (2021) estimates that a dollar of net flow into equities raises aggregate market value by roughly five dollars, an order of magnitude larger than frictionless theory allows. The mechanism is that few participants stand ready to absorb a large buy without a big price move, so demand shocks move prices instead of being arbitraged away. It is the analytical backbone for worries about passive flows: if markets are inelastic, mechanical index buying that ignores price can push valuations far from fundamentals. The application to index investing is developed in S&P 500. Seeded from S&P 500.