Regression Discontinuity and the Price Effects of Stock Market Indexing
Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University; China Academy of Financial Research (CAFR)
Harrison G. Hong
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
Princeton University - Department of Economics; Princeton University - Industrial Relations Section
June 2, 2014
Review of Financial Studies, Forthcoming
The Russell 1000 and 2000 stock indices comprise the first 1000 and next 2000 largest firms ranked by market capitalization. Small changes in the capitalizations of firms ranked near 1000 move them between these indices. Because the indices are value-weighted, more money tracks the largest stocks in the Russell 2000 than the smallest in the Russell 1000. Using this discontinuity, we find that additions to the Russell 2000 result in price increases and deletions in price declines. We then identify time trends in indexing effects and the types of funds that provide liquidity to indexers.
Number of Pages in PDF File: 53
Keywords: index inclusion, regression discontinuity
JEL Classification: G11, G12, G14, G2
Date posted: July 3, 2013 ; Last revised: June 11, 2014
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