Additions to Market Indices and the Comovement of Stock Returns around the World

30 Pages Posted: 18 Dec 2008

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: November 2008

Abstract

We investigate company additions to stock market indices over a six-year period in 39 developed and emerging markets around the world. For most markets, we find a post-inclusion increase in beta and an increase in the explanatory power of market returns (R2), reflecting increased comovement after inclusion between the added stock and rest of the index. In addition, for most markets there is a post-inclusion increase in stock turnover. These inclusion effects increase over time, tend to be stronger when the index is dispersed (i.e., includes many stocks), and in "common law" countries. These patterns appear to be inconsistent with the view that stock returns are generated by fundamentals only and are consistent with the category/habitat view of Barberis, Shleifer and Wurgler (2005). In line with this interpretation, we present evidence that the post-inclusion increase in comovement is positively correlated with the presence of index-oriented institutional investors in the market. We also present tentative evidence suggesting that, in less developed markets, the post-inclusion increase in comovement is related to information problems.

Keywords: Beta, Comovement, Index inclusion

JEL Classification: G10, G15

Suggested Citation

Claessens, Stijn and Yafeh, Yishay, Additions to Market Indices and the Comovement of Stock Returns around the World (November 2008). CEPR Discussion Paper No. DP7052. Available at SSRN: https://ssrn.com/abstract=1311176

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3081 (Phone)
+972 2 588 1341 (Fax)

HOME PAGE: http://bschool.huji.ac.il/facultye/yafeh/

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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