Regression Discontinuity and the Price Effects of Stock Market Indexing
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.
This paper was revised on October 10, 2013
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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