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Regression Discontinuity and the Price Effects of Stock Market Indexing

Review of Financial Studies, Vol. 28, No. 1, 2015

53 Pages Posted: 3 Jul 2013 Last revised: 19 Jul 2015

Yen-Cheng Chang

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)

Inessa Liskovich

University of Texas at Austin - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: June 2, 2014

Abstract

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.

Keywords: index inclusion, regression discontinuity

JEL Classification: G11, G12, G14, G2

Suggested Citation

Chang, Yen-Cheng and Hong, Harrison G. and Liskovich, Inessa, Regression Discontinuity and the Price Effects of Stock Market Indexing (June 2, 2014). Review of Financial Studies, Vol. 28, No. 1, 2015. Available at SSRN: https://ssrn.com/abstract=2288184 or http://dx.doi.org/10.2139/ssrn.2288184

Yen-Cheng Chang (Contact Author)

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Inessa Liskovich

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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