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.
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. This draft is a substantially revised version of our SSRN manuscript entitled "Rules and Regression Discontinuities in Asset Markets" dated March 25, 2011. Hong acknowledges support from an NSF grant. We thank Jeffrey Kubik, Larry Harris, Pete Kyle, David Lee, Jeremy Stein and seminar participants and discussants at Seoul National University, Tulane University, University of Washington, 2012 WFA, CICF, FMA Asia, Fall 2011 NBER Behavioral Finance Meeting, Winter 2011 Princeton-Lausanne EPFL Conference, Fudan University, National Taiwan University and the Swedish Institute for Finance Research for very helpful comments. We also thank Russell Investments for providing data and He Ai for her research assistance. The internet appendix is available online at http://www.princeton.edu/~hhong/rd2000appendix
- When a company from the Russell 1000 just makes it into the Russell 2000, its share price rises compared to that of a company that...
Yen-Cheng Chang & Harrison Hong & Inessa Liskovich, 2015. "Regression Discontinuity and the Price Effects of Stock Market Indexing," Review of Financial Studies, vol 28(1), pages 212-246. citation courtesy of