Regression Discontinuity and the Price Effects of Stock Market Indexing
National Taiwan University - College of Management
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
University of Texas at Austin - Department of Finance
June 2, 2014
Review of Financial Studies, Vol. 28, No. 1, 2015
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: July 19, 2015
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