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
July 25, 2013
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.
Number of Pages in PDF File: 53
Keywords: index inclusion, regression discontinuity
JEL Classification: G11, G12, G14, G2working papers series
Date posted: July 3, 2013 ; Last revised: August 13, 2013
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