> There is a theoretical possibility that the major stock indices will collapse to 0

In this article, we will present a plausible model for the dollar size of the US equity market that incorporates passive share. Our model relies upon a small set of assumptions that are nearly universally accepted, or at a minimum widely used by quant practitioners. While our assumptions are seemingly innocuous and uncontroversial, the implications of our model should be a cause for significant concern. That is the main point we wish to emphasize in our paper. Once the passive share reaches around 65%, index volatility may increase sharply. At 90% share, an increase in volatility at cubic speed is nearly inevitable, leading to exaggerated boom and bust cycles.

Given high enough passive ownership, there is even a theoretical possibility that the major indices will collapse to 0 before rebounding. Collapse can occur even over short (think intra year) time horizons, starting at a reasonable index level. The reader should think of this as a technical consequence of our model, rather than a strict pronouncement. Practically speaking, the transition to sharply increasing volatility is considerably more significant.

We fully accept that Central Bank market operations, direct government intervention and a variety of other factors are likely to prevent the 0 bound from ever being reached. However, this paper helps to quantify a risk that is hiding in plain sight, with the potential for causing major market disruption. Our results should be viewed as critical systems analysis for a major driver of the global economy.