Comovement of Newly Added Stocks with National Market Indices: Evidence from Around the World

37 Pages Posted: 5 May 2009 Last revised: 28 Oct 2011

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: September 19, 2011

Abstract

We document the prevalence around the world of increased stock price comovement experienced by companies when added to major indices, and shed new light on the causes of this phenomenon. Using newly-constructed and extensive data covering forty developed and emerging markets over the last decade, we document that in most, though not all, countries, when added to a major index, a firm’s return experiences a post-inclusion increase in comovement with the rest of the index, reflected in both a higher beta (especially if the pre-inclusion beta is less than one) and greater explanatory power of the market return (higher R2). Stock turnover and analyst coverage also typically increase upon inclusion. Using a variety of empirical tests, we find that the demand-based view of comovement (the category/habitat views of Barberis, Shleifer and Wurgler, 2005) provides a good explanation for many of our findings. Some results, though, suggest that information-related factors are also important.

Revised version of a paper formerly circulated as CEPR Discussion Paper: http://ssrn.com/abstract=1311176

Keywords: index inclusion, comovement

JEL Classification: G1, G3

Suggested Citation

Claessens, Stijn and Yafeh, Yishay, Comovement of Newly Added Stocks with National Market Indices: Evidence from Around the World (September 19, 2011). Available at SSRN: https://ssrn.com/abstract=1397208 or http://dx.doi.org/10.2139/ssrn.1397208

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Yishay Yafeh (Contact Author)

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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