Regression Discontinuity and the Price Effects of Stock Market Indexing

Yen-cheng Chang, Harrison Hong, Inessa Liskovich

NBER Working Paper No. 19290
Issued in August 2013
NBER Program(s):   AP   CF

Studies find price increases for additions to the S&P 500 index but no decreases for deletions. Additions come with good earnings news, suggesting these studies are not just measuring an indexing effect. We develop a regression discontinuity design using Russell Indices for cleaner identification. Stocks are assigned to indices based on their end-of-May market capitalizations. Stocks ranked just below 1000 are in the Russell 2000. The indices are value-weighted so these stocks receive index buying whereas those just above 1000 have close to none. Using this random assignment, we find price effects for both additions and deletions.

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This paper was revised on October 10, 2013

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Document Object Identifier (DOI): 10.3386/w19290

Published: Regression Discontinuity and the Price Effects of Stock Market Indexing Yen-Cheng Chang Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University Harrison Hong Princeton University Inessa Liskovich Rev. Financ. Stud. (2015) 28 (1): 212-246.

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