DJIA Index Membership and the Flow of Information Between Stock Returns

Abstract

We contribute to the limited literature on interactions between individual stocks at the market microstructure level by utilizing an asynchronous multi-asset data integration methodology. For the periods before and after the Dow Jones Industrial Average (DJIA) revisions in 1999 and 2004, we investigate effects of membership in the DJIA on the changes in the relative speed of price adjustment to common information. Although, for the analyzed stocks, index membership in many cases is associated with a higher relative speed of price adjustment, it is neither a necessary nor a sufficient condition for having a lead in price movement.

Keywords: Tick-by-tick multi-asset data integration, DJIA revisions, Leag-lag relationship

JEL Classification: G14, G19